Misconceptions about taxes
In various comment sections, and also in the media, I am seeing lots of misconceptions about taxes. For instance, lots of people wonder why I focus so much on efficiency, and not on “who pays what”.
I recall once chatting with my wife about our flexible benefits plan, which causes her lots of aggravation. She was surprised to hear me say I wish they would abolish it, as in her view we “benefit” from the program. Let me use an analogy to explain exactly how we “benefit” from this tax break.
Imagine a government that took 10% of each person’s income, and put in in a wooden box. The box was placed at the end of a 10-mile gravel road. Each citizen was given a knife, and told then could crawl on their hands and knees down the road, and then use the knife to cut a hole in the box, and retrieve their money.
Now let’s view these two policies in isolation. There is the 10% tax on income, and the “knife, gravel road and box program.” Considered in isolation, we clearly benefit from the knife, gravel road and box program, as we are free to either try to get our money back, or not. That’s more options than if the program didn’t exist. I’m sufficiently lacking in self-respect to actually crawl down the road, knife in hand, to get back 10% of my income. Thus it seems like I’d be worse off if they eliminated the knife, gravel road, and box program. That’s the sense in which my wife thought we benefited from the flexible benefits tax break.
But that’s not how I see things. I see the original 10% tax on income and the subsequent tax breaks as being linked. The gravel road just seems like a big deadweight loss to me. This is how they do things in Venezuela, not Sweden.
I can certainly understand how others might see things differently. Some want to crawl down the gravel road, fearing that if they abolish the program the government will not reduce their tax rates, instead the money in the box will be diverted to welfare for the poor, or higher salaries for teachers. I can’t deny that this might occur, but if we don’t even TRY to build a good country, how can we possibly succeed? Isn’t it better to try and fail, rather than not even try?
BTW, it’s not at all clear to me that we wouldn’t get some of it back in the form of lower taxes, if they closed loopholes. Note how the GOP is doing the current tax bill—a specific deficit target in mind, and trade-offs between tax rates and number of loopholes.
Another group wonders why I oppose taxes on capital income, or (what amounts to the same thing) estate taxes. Assume the estate tax is 40%. Also assume a 10% sales tax (or VAT.) How do those two taxes impact decisions on buying an expensive yacht?
Under this tax regime, the rich face the following choice:
1. Consumption now is taxed at 10%
2. Consumption later (by heirs, after death) is taxed at 50% (40% + 10%)
That distorts people’s choices, encouraging more consumption today, and less future consumption, i.e. less saving and investment.
Some people wrongly assume that I oppose the estate tax because I’m somehow sympathetic to wealthy people. Not so. I have no problem with a 50% tax on all big yachts. I’m a utilitarian. My problem is with taxes that tax future consumption at higher rates than current consumption. That’s just dumb. There is no excuse for this sort of tax.
Now it just so happens that we once had a big tax on yachts, and other luxury goods. But then something really strange happened—the luxury tax was abolished. And one reason it was abolished is that even Democratic politicians became opposed to the tax. Yes, even Democrats don’t want to tax really rich people who splurge on high living; they want to tax thrifty rich people who put their money back into investment projects that help the economy to grow.
And then it gets even weirder. The reason given for opposing the tax on yachts was that it hurt the shipbuilding industry. Just think about the implications of that argument. When a rich person pays a tax, the money comes out of either consumption, investment, or charity. Economists look at tax burdens in terms of consumption. If the tax doesn’t reduce your consumption, then you are not paying the tax, someone else is. So the only taxes that truly fall on the rich are taxes that reduce their consumption. Nothing else touches them. You can tax Larry Ellison, but you can’t tax Warren Buffett–he’ll consume the same (modest) amount no matter how high you raise his taxes.
So when we finally got a tax that truly hit the rich—a tax on yachts—it was repealed because it was felt that it would “cost jobs”. But the only reason economic inequality matters is because it leads to consumption inequality. If you are not reducing the consumption of the rich, then you are not reducing economic inequality. And any tax that reduces the consumption of the rich will cost jobs in industries that make things for rich people. If we are so terrified about costing jobs in the maid and butler industry, the spa industry, the luxury car industry, the yacht industry, the mansion building industry, etc., then there is literally no way that we can ever touch the rich.
So come back to me when the progressives have a sensible proposal to make the tax system more progressive. I’d be glad to support it. Until then I’ll oppose estate taxes and more generally all taxes on investment income.
PS. Tax avoidance is a problem for all taxes (income, estate, and consumption)—there are ways to minimize the problem without creating a hugely inefficient income tax regime.
PPS. After my previous post a commenter pointed out that the Senate bill seems to abolish the marriage penalty. I believe it just makes the penalty smaller, but nonetheless I should have pointed that out.
Dec 4 2017 at 4:21pm
OK, I understand why in that mystical world of your preferred taxation on consumption you are against the estate tax.
But what does that have to do with the estate tax in the current world? In our world, income or wealth passed on untaxed via an estate is never taxed. That doesn’t seem neutral.
Of course they make an exception for us peons. If you inherit an IRA it gets taxed like regular income and you have to take it out mostly right away (unless the deceased was unusually young).
Dec 4 2017 at 4:45pm
Your analysis on estate tax leaves out the step-up in basis. Nearly all billionaires have majority of their estate subject to capital gains against a much lower basis. So it would be 10% + 20% = 30% tax paid.
A progressive VAT may be ideal solution, if the “progressive” part can work practically. That would tax both principal and earnings on investment. It also wouldn’t discourage asset turnover like cap gains tax does now.
Dec 4 2017 at 5:19pm
As for the estate tax, it seems that the choice to bequeath something to someone is consumption exactly like the decision to purchase a hamburger at the time of death. From the standpoint of taxing consumption progressively, the estate tax seems perfect. [Of course if we had a real progressive consumption tax, it would be OK to pass the estate and tax the consumption when the heir consumed it. But we don’t have such a tax yet.]
But still all the deductions removed or not removed seen irrelevant (How big a distortion is it to allow teachers to deduct [why not a tax credit?] money they donate to their students by purchasing school supplies? What decision is being distorted by allowing the deduction of SLG taxes?) compared to the after-tax income effects of reducing corporate tax rates and increasing the deficit.
Reducing tax rates on corporate income (ideally eliminating it) really needs doing because the corporate income tax is so riddled with exemptions that the tax changes capital allocation incentives between sectors. Those are not small triangles. But the corporate tax could be reduced without reducing revenues if the revenue were replaced with higher personal taxes collected from the upper tax bracket and one or more additional ones.
Dec 4 2017 at 5:34pm
Scott – I find your statement:
in reference to the lack of a sensible more progressive tax system. Well I do know that Robert Frank at Cornell has proposed such as system and it does make sense.
The bigger issue is that investment income can be part of ‘work’ for some people. Let’s take Warren Buffett as the perfect case example. He has worked at Berkshire Hathaway since the mid-1960s. The company is an investment vehicle that owns companies and common stock. Almost all of his wealth is tied up in stock of the company. He has probably several $billion in unrealized capital gains as the stock is still held. Now if the estate tax is eliminated any stock that he would give to heirs (leave aside his pledge to donate most of the stock to charity) non of this would be taxed. Similarly, if he decided to sell stock and pocket the money (again a remote possibility) would you deem this investment income and not taxable?
So much could be done to simplify our tax code so that it would take 15 minutes to do a filing but of course this is not the intent of the current legislation.
Dec 4 2017 at 6:10pm
This objection always bothers me. Is there any tax that *doesn’t* distort people’s choices?
If you raise the income tax rate, I will have to pay more for services, and I will do more things myself, less-efficiently, rather than hire a specialist.
If you raise the sales tax rate, I will have to pay more for goods, and I will have an incentive to spend less and work less and enjoy more free time (the untaxable luxury!) instead.
If you raise the property tax rate, even if it wasn’t a property tax as distorted as is typical, it would still give me an incentive to spend less on improvement of the taxable property and more on other consumption.
Hell, even if you start a Georgist land tax, the tax touted as free of economic inefficiency, that seems *still* likely to distort marginal investment, into businesses that require relatively less taxable land among their inputs!
Dec 4 2017 at 7:49pm
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Dec 4 2017 at 9:32pm
“But the only reason economic inequality matters is because it leads to consumption inequality.”
I agree with this, but it seems like most people don’t agree at all, and I think we need to do a better job understanding and addressing the reasons why they don’t; it is not just a case of people not having thought it through.
Specifically, I think most people believe *wealth* inequality matters a lot even if it does not lead to consumption inequality. The version of this belief with which I have the most sympathy goes something like: yes, consumption inequality is what we should really care about, but wealth inequality leads to _actual_ consumption inequality far beyond what typical expenditure-focused metrics for consumption inequality can measure.
Here are some of the common arguments for that belief as I understand them:
1. Network wealth. Wealthy people tend to have better social network access to other wealthy people, typically because they got that access in the course of accumulating their wealth. This network access can have consumption value. Warren Buffett is a fine example here; his wealth and stature and rich friends give him free passes to a lot more luxury than the typical person who owns a middle-class house in Omaha and has no yacht. Moreover, his kids can get lucrative personal introductions to investors, letters of recommendation to schools, etc that otherwise-similarly-consuming people’s kids could not.
2. Psychic consumption value of knowing one is wealthy. This is the “making money to run up the score” phenomenon that is supposedly a common thing in finance, for example. I don’t think we should care at all about this sort of inequality but many people seem to.
3. Insurance value of wealth against severe downside shocks to consumption, and the present-day psychic consumption value of the peace of mind which that insurance brings. At least in theory, it seems like if you believe insurance premiums are a consumption expenditure (do you? It’s not obvious to me how these are treated in consumption metrics) you should try and figure out a way to model this similarly. Steve Randy Waldman of Interfluidity did a post on this a few years back, IIRC. Having a network of rich friends (or family– think of Lorelei Gilmore on Gilmore Girls, say) is also very effective insurance, so this is related to #1.
4. Wealth as a route to political influence. You can capture some of this by treating political campaign contributions as consumption expenditures– but it’s an interesting question whether there’s a free-speech-compatible way to apply consumption taxation to those expenditures! And wealthy people may also know more politically powerful people even if they don’t consume a lot, because
(a) in the course of making their wealth they may have had to get to know those people
(b) those people want to know *them* because they might be future donors
and personal connections matter to political power even in the absence of donation money, so this is also related to #1.
Dec 4 2017 at 9:37pm
@Quite Likely makes a point I don’t really understand. Why is it desirable to “limit the growth of dynastic wealth”?
Personally, I think I’d rather like having a large number of acquaintances, friends, neighbors, lovers, etc. who were members of super rich dynasties. Maybe I’m wrong, but I don’t think that’s the objection to dynastic wealth.
I’m guessing it has to do with those dynasties accumulating the political power to defend their wealth *at the expense* of others. But if so, wouldn’t we want to prevent the “at the expense of others” part, as opposed to the “dynastic wealth “ part?
Dec 4 2017 at 9:58pm
If there is a way to differentiate the desire to tax inheritances from envy or simply punishing the rich, I am not aware of it.
Dec 5 2017 at 12:35am
Thaomas, You said:
“From the standpoint of taxing consumption progressively, the estate tax seems perfect.”
You haven’t addressed the arguments in this post.
And tax deductions are very inefficient, reducing national income. That’s why the teacher deduction you mention is unwise.
Alan, I agree that it can sometimes be hard to distinguish between labor and capital income. In those cases income should be assumed to be labor income.
roystgner, You asked:
“Is there any tax that *doesn’t* distort people’s choices?”
No, but you’d like to minimize distortions by at the very least taxing current and future consumption at the same rate.
Quite Likely, I have other posts that describe my views on the optimal tax system.
Nicholas, Most of that can be addressed by making the tax system progressive.
Dec 5 2017 at 1:34am
I think people misunderstand inheritance tax in much the same way they misunderstand corporate tax. The main reason so few estates are subject to inheritance tax is because that represents an either an epic lack of planning or a surprising valuation of an illiquid asset, like real estate.
Someone with have lots of assets wouldn’t leave them directly to their descendants but instead place to assets in a trust. So when you pass on, the assets are not transferred to another person and not considered a gift.
You can directly pass up to $5.5M to all survivors in cash or assets, and most wills will have a provision to do exactly that, while leaving the excess in a trust. That remainder trust can still benefit survivors because a trust can buy assets (homes, cars, yachts, businesses), make loans, buy services (school, medical care), give to charities and make political donations. Really it can buy whatever the trust contract allows.
If you had a family farm, and it’s owned by a trust, it doesn’t get liquidated unless the trustees decide it’s a good idea. If they did that, the best option would be to leave the cash in a trust and benefit from the cash.
This doesn’t avoid tax because a non-revocable trust pays tax just like a person, which in the case of a well endowed trust is a rich person. It also has some non-person qualities which prevent it from taking specific tax deductions, so it’ll probably pay a higher marginal rate compared to spreading out the money.
Eliminating the estate tax will allow assets to be directly transferred to survivors without having to pay a 2% management fee for a trust and thousands in legal fees. That sounds like less deadweight loss.
Dec 5 2017 at 9:23am
John- you’ve got that wrong. You can’t avoid estate/gift tax just by transferring to a trust. A gift during life to an irrevocable trust is subject to gift tax (and if the gift is to a revocable trust then the money is considered to still be part of the donor’s estate and thus subject to estate tax). A bequest to a trust at death is subject to estate tax. There are ways to use trusts to minimize estate and gift taxes, but they aren’t nearly as easy or as complete as you describe. Most have to do with transferring assets to the trust when they are at a low value, expecting them to increase, or creating a legal argument that the assets aren’t as valuable as the really are.
Dec 5 2017 at 10:46am
“[T]he choice to bequeath something to someone is consumption exactly like the decision to purchase a hamburger at the time of death.” No, merely transferring an asset to another person is not consumption: a hamburger is (normally) *consumed*–that is, *destroyed*–immediately, whereas the funds passed to an heir or any other person can be, and in the case of large bequests usually for the most part are, *saved*.
Dec 5 2017 at 11:25am
adam, I agree with your assessment, and support the idea that it requires planning to avoid estate taxes. I’ll add the assertion that there are few circumstances where you are surprised by a windfall in excess of $5MM.
Let’s look at the 2016: 0.2% of estates were subject to inheritance tax. Yet the top 1% of households have net asset values of $10MM. Even if you assume they’re married households which doubles the exemption – that put you in approximately the top 0.8% of households.
This is total households, not ones biased towards the ages where people die, which are likely to be richer. Either way, it supports my assertion that most households with estates large enough to avoid the estate tax find ways to avoid paying it.
The deadweight losses are higher than the costs of successful estates because we don’t know how many people take ultimately unnecessary steps to avoid inheritance taxes.
Dec 5 2017 at 12:06pm
@Robb – “In our world, income or wealth passed on untaxed via an estate is never taxed.”
The income and wealth was taxed when it was built initially–either through income tax, capital gains tax, etc. An estate tax taxes that capital a second time whereas if the deceased were to splurge and spend huge chunks of that estate before their death, they avoid the second tax.
Dec 5 2017 at 12:49pm
Why aren’t bequests not giant lump sums of consumption? Taxing them seems like a pretty good second (1.1nd?) best approximation of a progressive tax on consumption. OK, it is not as good as taxing them with a progressive consumption tax on the heirs, but that is not what was done.
How do we know that deductions are “very inefficient?” Don’t we need to know what the elasticities are? And don’t we need to compare their inefficiency (as a departure from taxing consumption progressively) to their alternative?
Taxes on business income is a very inefficient way of progressively taxing personal consumption (especially since business income is not all taxed at the same rate), so decreasing that tax and increasing taxation of personal income or high income people (pending a move to progressive consumption taxation) ought to be an efficiency and equity improvement. I cannot see how recouping part of the revenues lost out of even “inefficient deductions” is an obvious improvement. Even less is just not recouping the losses at all by increasing the structural deficit.
Dec 5 2017 at 1:32pm
I think wealth is basically an insurance policy.
If you have wealth and don’t spend it, you are still consuming more than someone who hasn’t got the wealth since you are buying peace of mind.
I think this benefit is actully quite valuable. It means you can take risks other people might not be able to take.
It’s a form of consumption that is difficult to measure, but most people value it a lot. I know I do.
To be honest I am also kinda skeptical there is a vast reserve of potential investments that we could tap if only taxes were lower. I think truly productive investments are actually more the binding constraint. We count invetories as investment, but there is no reason to believe that they would really generate future wealth. Storing consumption goods is not going to change future production capacity.
Dec 5 2017 at 1:58pm
–“Why aren’t bequests not giant lump sums of consumption? Taxing them seems like a pretty good second (1.1nd?) best approximation of a progressive tax on consumption. OK, it is not as good as taxing them with a progressive consumption tax on the heirs, but that is not what was done.”–
Because the estate tax is an incremental tax on saving and investment performed by the very wealthy. Say we have $100 of business profit which is intended to be paid out as a dividend. That $100 is hit with an effective corporate tax of 25%, reducing it to $75, then it is hit again with a dividend tax of 23.8%, falling to $57.15, then it is hit yet again with a 40% tax, falling to $34.29, representing a 65.71% effective tax rate on the original $100 of business income.
At the same time, this tax raises a negligible amount of actual tax revenue (~$23 billion vs. $3,626 billion total in FY2017) and creates a significant amount of effort devoted to doing nothing other than avoiding the tax liability as much as possible.
It does nothing meaningful to reduce economic inequality, nor does it prevent dynastic wealth. The Walton kids are all worth ~$45 billion currently, and even if an amped up estate tax had taken another 95% of their wealth, they’d still be multibillionaires right now.
If eliminating the distortions caused by the estate tax raises future economic growth by just 0.1%/yr, it would only cost $45 billion over 10 years and would actually raise revenue by $444 billion over 20 years, without even counting the fact that capital gains which were stepped-up under the estate tax would now be carried over by heirs at purchase cost.
Dec 5 2017 at 3:08pm
John and Adam, Thanks for that info.
Thomas, You said:
“Why aren’t bequests not giant lump sums of consumption?”
You are missing the point. There is nothing wrong with taxing consumption, but don’t tax future consumption at much higher rates than current consumption. Rather you might want to tax high levels of consumption at much higher rates than low levels of consumption.
How do we know that deductions are “very inefficient?””
I know first hand, because our family spends an enormous amount of time dealing with hassles that are ultimately related to the income tax system. In contrast, I spend almost no time doing my payroll tax, sales tax or property tax.
For instance, many of the hassles of dealing with insurance companies are ultimately caused by the tax deductibility of health insurance.
Mario, That’s a good argument for a progressive consumption tax.
Dec 5 2017 at 5:09pm
“At the same time, this tax raises a negligible amount of actual tax revenue (~$23 billion vs. $3,626 billion total in FY2017) and creates a significant amount of effort devoted to doing nothing other than avoiding the tax liability as much as possible.”
I don’t like how this argument is framed. Bills have been proposed before to eliminate the various loopholes of the estate tax. Those get shot down and then the argument becomes “What’s the point of having the estate tax? The rich will get around it anyway.”
These are the same people! The rich get around it because of loopholes which they do not allow to be closed. This article gives some detail about the Waltons’ trusts.
Under estate tax repeals currently proposed, the heirs will have:
1. No estate tax.
2. Step-up in basis, so no capital gains tax.
3. No, or very minimal, consumption taxes.
4. Dividend tax can be avoided by simply selling the stock at stepped up basis. Qualified dividends would be taxed 15% or 20%.
5. Corporate tax cannot be both incident on workers and paid by heirs.
On a whiteboard, purely having a progressive consumption tax gets around many issues. Labor and investment income is taxed the same. Consumption by the living and consumption by heirs pays the same tax.
But there are many practical issues. The “paradise papers” show a lot of VAT avoidance. See how Lewis Hamilton “leased” a private jet from an offshore company he set up, trying to get around paying VAT for the private jet.
Dec 5 2017 at 5:27pm
I agree with you 100%, and I know you said this to be funny, but I must comment. I hate keeping track of deductibles and multiple retirement accounts (S-IRA, 401K, Roth IRA, traditional IRA) I would give them all up for lower rates.
Didn’t you mean more money for school administrators. The bureaucracy is expanding to meet the needs of an expanding bureaucracy.
I kind have been wondering if maybe we do not we trust teachers and our fellow citizen enough.
I kind of think, considering the quality and motivation (really I’m being serious) of the people who go into k-12 teaching, that we could just have principals (accountable to parents) and teachers and divide up the students 15 per class, including 90% of special needs students, and we would better off and save some money too.
Schooling is a favorite object of charity and most people who go into teaching seem to want to have a positive impact on children, so why do we need a bureaucracy?
Dec 5 2017 at 8:02pm
I tend to see fixing one aspect of the estate tax as likely to aggravate another bad aspect of it. For example, if you close loopholes, you raise more revenue (and likely a negligible amount) then you increase the problem of excess taxation on saving on the wealthiest investors and spur even more business in the tax avoidance (err.. wealth management) industry.
I’ll admit that I just don’t like the estate tax for myriad reasons. It’s a clunky revenue source full of excess deadweight loss and compliance costs relative to the amount of revenue it raises. It creates a distortion between the decision to consume in the present or the future. It does not solve the problems that proponents say justifies the existence of the estate tax (inequality, dynastic wealth, etc).
I don’t like social engineering and I also share Arnold Kling’s dim view of the efficiency of non-profits vs. for profit businesses and so I don’t necessarily see a government ‘encouragement’ to charity or nonprofits as desirable or necessary. I’d want the government to get its required tax revenue in as simple and straight forward way as possible, taxing income one time, optimally with a flat rate with a little bit of progressively baked in through personal exemptions.
I don’t have this view because of wanting to benefit the rich per se. Within the last week or so I was on The Money Illusion asking Scott about a low, flat wealth tax, and realized from his comments that I was making a pretty basic error in that the wealth tax represented an excess burden on saving/investment.
Dec 6 2017 at 11:17am
Your not considering a bequest as ‘consumption,” wheres I do, just shows that a progressive “consumption tax” (still the best objective) is not straightforward. It would no doubt treat some kinds of consumption (big medical bills?
Donations to charity?) differently from others.
Dec 6 2017 at 1:00pm
Not only is the bequest of an estate not consumption, taxing an estate is really really arbitrary.
If an estate is left by parents to the eldest child, and she dies, the estate should be taxed twice by the time the next eldest child gets it? What is the sense in that?
And if one brings up the fact that estates are normally divided among children and their children, or that trusts can be set up to shield estates from some of this taxation, then one is simply proving the point that a lot of wasteful time and really wasteful investment decisions are made in order to avoid what is at its core an arbitrary tax.
That said, stepping up the basis upon inheritance is also really really arbitrary. Should the doubly inherited estate have its basis reset twice?
The right way for tax law to handle investments is to act like there was no change in the ownership of the investment at all. Do not tax it when it changes hands: Tax it solely at liquidation based on who liquidates it and from the basis of when the investment was generated.
Everything else is distorting and, in the end, wealth destroying.
Dec 6 2017 at 1:21pm
Scott you wrote:
1. Consumption now is taxed at 10%
2. Consumption later (by heirs, after death) is taxed at 50% (40% + 10%)
But if you buy a yacht now and pay the 10% consumption tax, and then leave the yacht to your heirs, don’t they also pay the 40% inheritance tax at that time? So isn’t it taxed the same in either scenario?
I must be missing something simple.
Dec 6 2017 at 2:05pm
You’re missing that a yacht is not just an investment. The owner now has more wealth to operate it — i.e., to use it as consumption — than his heirs will have.
Can I Afford a Super Yacht?
Using the 10% per year operating cost from that article, the owner who spends half his wealth on a yacht can operate it for ten years. If his heir buys the same yacht after a 40% estate tax, she can operate it for only two years.
Dec 6 2017 at 2:41pm
I’m aware of the arguments for either a simple income or consumption tax. All investment profits are theoretically based on some principal investment. So income tax on the front-end reduces the principal and thus investment profits.
In the real world, there is not a clear division between labor/investment income. Bill Gates’ ownership of Microsoft probably was a nominal investment when it was first incorporated. Any later stock grants, to offset dilution, could be taxed as income. But most of his wealth would be tax-free under a pure income tax regime.
We can talk about distortions on a whiteboard and in economic papers, but that just seems wholly unjust. A consumption tax has the same non-distortion properties, but it would be after returns on investment. It does not have to make the distinction between labor and investment, and it taxes extraordinary returns on investment (such as Gates’ nominal investment at incorporation).
Whether a progressive consumption tax could work practically is another story. See my link to how Lewis Hamilton leases private jets from himself to avoid VAT.
While the multi-layered system is messy (income, corporate, cap gains, dividends, estate), I would definitely prefer it to a pure income tax system. Each layer does not have that much elasticity in the end. In other words, Larry Ellison probably buys the yacht regardless of tax systems.
Dec 6 2017 at 2:48pm
I should clarify when I say elasticity, I mean how much each of those taxes changes *actual* activities.
For example, Apple is not likely to change their iPhone selling activities under any corporate tax regime. They will still sell to the same countries and manufacture in the same places.
Apple *does* change the “activity” that they report to the IRS based on tax laws. Apple of Ireland underpaid for royalties to sell iPhones outside of US. So more of their profits were shifted to Ireland, while most of the IP was still developed in America.
There is an economic difference between actual activity changing and tax returns changing. The only deadweight loss for tax returns changing is more hours for lawyers. BTW, both tax bills encourage this activity more, no less, because foreign subsidiaries have permanently lower taxation.
Dec 7 2017 at 9:20am
–“In the real world, there is not a clear division between labor/investment income. Bill Gates’ ownership of Microsoft probably was a nominal investment when it was first incorporated.”–
Of course, but Microsoft itself is taxed, thus taxing the owners of Microsoft shares. Microsoft paid $3.3 billion in taxes in the year ending June 2016, and it appears he owned about 2.1% of the company at that time, thus he was effectively taxed ~$69.2 million. His remaining wealth in Microsoft represents the expected value of after-tax income flows to the company. If Congress came out today and said ‘you know what, we’re getting rid of corporate income tax altogether’, MSFT would likely rise by something like 15%, as the tax burden would be eliminated.
–“A consumption tax has the same non-distortion properties, but it would be after returns on investment. It does not have to make the distinction between labor and investment, and it taxes extraordinary returns on investment (such as Gates’ nominal investment at incorporation).”–
I agree that in principle, a consumption tax levied as an income tax minus saving on only individuals would be effectively the same as a combined wage tax/business tax, so long as charitable contributions are counted as consumption in your proposal.
Dec 7 2017 at 9:28am
–“Whether a progressive consumption tax could work practically is another story. See my link to how Lewis Hamilton leases private jets from himself to avoid VAT.”–
Any system will have evasion.
In 2008-2010, the tax gap was over $400 billion, of which $329 billion was from individual income tax alone. Average income tax collection those years was $986.5 billion, which means that 25% of individual income taxes owed were never paid. So it’s not whether or not some VAT wouldn’t be collected, it’s whether the number would be materially worse than 25%.
Dec 10 2017 at 12:33am
It’s hard enough for children to break from parental control in middle and lower class families. At least some of their scions pursue their talents or interests (or simple economic necessity) into other lines of work.
Historically this has been more difficult with generationally wealthy families (my intuition/bias, which may be wrong – not applicable to agrarian societies, Greek city states, etc….).
The control having a parental expectation, or having an outsized inheritance, typically has over the next generations is something a society which seeks to maximize talent development (e.g. genuine meritocracy) should compensate for.
I genuinely feel sorry for the scions of the British Royal and noble families. I’m not envious of their wealth because I know that my personal autonomy would be far more constrained than it is now were I in their positions.
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