Wednesday, August 08, 2007

Supply-Joke Economics

For the life of me, I can't fathom why anyone takes supply-siders seriously. Because their "theory" has no basis in reality. Now don't get me wrong, I have absolutely no doubt that a high tax rate can stifle an economy. For example, a 99% flat tax would probably be a bad idea. And I consider a 70% tax rate to be far too high and a bad idea. I mean, why should I bother risking $100,000 of my cash, when the best after-tax profit I could reasonably expect might be as high as 6% annually (that's a 20% profit, less 70% tax bill), and I could lose the whole thing. It's safer to just put it in a mattress and wait for tax rates to go down. When you only get to keep 30% of your profit, there's little point in making one.

But the main point of Supply-Side and the Laffer Curve is that there is an optimal tax rate. And that if taxes are too high or too low, you won't have optimal tax revenues. And I agree with that completely. And I can't see anyone disagreeing. Believing this doesn't make you a supply-sider. It makes you a non-moron.

If you care to disagree with me, I guess I'll debate the point with you. But be prepared to be schooled, as you can't possibly win this one. If you agree that a 99.9% tax rate would stifle our economy, then I already win the debate.

Einstein's Beetle Clock

So the real difference isn't whether tax rates can be too high, but what the rates should be. And we have no good idea on that. I'd easily say that 80% is too high and 15% is too low, but after that, we're getting into hazy territory. Especially as I doubt that the optimal rate is some fine-tuned narrow number. In fact, I'm sure there is a wide range of where tax rates could be without doing serious harm to tax revenues.

Rather than supply-side being some overriding theory of economics, it's more like a minor rule which only applies if you do really extreme things to the tax rate; like by making it 90% (which it has been in the past). And it also applies if the rate is too low; which I'm sure many supply-siders would be glad to see. But treating this as an everyday economic consideration is comparable to using Einstein's Special Theory of Relativity to readjust your car clock while driving at highway speed. Sure, the theory does apply, but only at speeds that you're unlikely to reach in your old Beetle.

And whatever the optimal rate is, I seriously doubt that minor fine-tuning to tax rates will have any significant effect on our economy. Like moving capital gains from 20% to 28%. It's quite doubtful that the 8% difference is going to dent our economy to such an extent that we'd lose more revenues than we gained from the rate increase. And I showed that to be the case in my last post. We raised the rate, the economy continued to grow, and revenues went up. Just like we always see. It's not supply-side that wants these tax cuts. It's greed.

Spending the Beast

And even the underlying principle of supply-side is entirely absurd. If "Tax & Spend Liberals" really just wanted more tax money so they could spend more of it, and lower tax rates truly did generate more revenue...then wouldn't the T&S Liberals want the lower rates? Of course they would! Conversely, if "Starve the Beast" conservatives truly wanted to starve the government of funds, wouldn't they wholeheartedly agree to adopt high tax rates, at least for a short enough period to starve off government revenues? Sure. The rich would surely have enough funds to tide them over until the drought was over, and then they'd have the smaller government they so desired.

But no. The people who want more tax revenues support higher tax rates, and the people who want lower tax revenues support lower tax rates. Just as you'd expect to see if lower tax rates generated lower tax revenues. Duh.

How conservatives get away with suggesting that lower tax rates generate more revenue while simultanously insisting that they're against government spending and want less revenue I'll never know. I guess it's because when liberals encounter proponents of this lamebrained theory they're either too dumbstruck to say anything or they relish in the details of the debate, rather than bashing the overall absurdity of the thing.

But that's what needs to be done. To laugh at these people. We just can't take them seriously. Why should we? They don't take themselves seriously. This is just yet another of their little games they like to play, to pretend that they really want higher tax revenues; when all they really want is a lower tax bill. And so they'll recite a few cherrypicked numbers that they haven't even looked at themselves and pat themselves on the back for having scored a few points.

And they'll never listen to your explanations and will insist that you're the cherrypicker. And even if you somehow get them to look at the real numbers, they'll find some reason or another to ignore them. And so why bother. Just laugh. It's all they deserve. They're not actually thinking about what they're saying, so why should we?

16 comments:

whig said...

A 99.9% tax rate on rental value of land and minerals in situ would not necessarily stifle the economy.

whig said...

Are you uninterested in debating the point or do you concur?

Doctor Biobrain said...

Sorry, I started to write a response, but didn't understand the context of your claim and thought this might have been joke I should just ignore. But if you insist...

And I suppose this was my fault, as I was only referring to tax rates on things that are a regular part of our economic activity: Like a 99.9% income tax or a 99.9% capital gains tax. And so a tax on something that isn't a large part of our economic activity would probably not have a significant effect on the economy. For example, a 99.9% tax on the sales of Extrarrestrial Aliens would probably not hurt things very much, as there really wasn't much of a market for that kind of thing in the first place.

But as far as your claim, I have no idea what you're talking about. Rental value of land and minerals? Does that mean a tax collected on the rent received for renting out land, or a tax on the value of the land itself, whether or not it is used for such a purpose?

But whatever it is, a 99.9% tax would most surely make any such activity useless and would significantly hurt the economic well-being of anyone engaged in such activities to such an extent that they'd stop doing such a thing. And thus, we would collect far less in tax revenues than we would had we charged a reasonable rate.

And I suppose that's the main point, and perhaps I should update my post. It isn't that extra high or low taxes specifically hurt our economy. It's that extra high or low taxes significantly hurt our ability to generate proper tax revenues from any activity to such an extent that they would be counterproductive and bad for the government. That's what supply-side economics states and that is simply irrefutable.

Of course, this only applies if we're wanting to generate more tax revenues. If our goal is to stop a certain activity, like by increasing cigarette tax to stop smokers, that's a separate issue. But if higher tax revenues are our goal, then we would be wise to avoid extreme tax rates, as they significantly hamper our ability to collect more revenue. And I guess that would include your 99.9% tax on rental value of land and minerals, whatever that means.

There, that should take care of the little SOB.

whig said...

Tax on the value regardless of whether it is rented in fact.

We ought to exempt a portion for people to live on tax free, and collect the rent from corporations and foreign title holders.

I don't care what rate you set as long as it isn't higher than the rental value. If it is 100% of the rental value, there becomes difficulty in appraisal.

If you tell me why it won't work you'd be the first person. It works, it has always worked, it will always work. Income tax will fail in the long run because people don't want to report on themselves. I don't care what the rate is, even 1% is too much. It will fail.

How's that for an SOB?

Doctor Biobrain said...

I just wrote a bunch of questions about this, but deleted them because I had an overriding question: You're actually suggesting a 99.9% tax on the potential rental value of land a business owns wouldn't hurt our economy? How's that?

And I still don't understand what your system is. What is the rental value of land? Isn't that how much rent I could charge if I was renting it? So a landlord that received $1 million in rent would have to pay almost all of it as tax? Does this apply to landlords who own residential property too? Either way, I don't see how a 99.9% tax wouldn't put them all out of business. I'm confused.

And frankly, I've never quite understood why businesses pay taxes anyway. It's ultimately the consumer who pays it, so what's the point? But as things are, we tax profitable businesses more than unprofitable ones, so it levels the playing field. It looks like you'd do away with that.

And it looks like your tax would surely doom start-up businesses, as they aren't expected to pay income tax until they become profitable and have the money to pay it. But you'd make them pay the tax anyway.

And online companies would have a huge advantage over store-based companies. And businesses like Kmart would have tax bills far exceeding Exxon's, even though Exxon has far more money to pay. And big corporations would have a much better ability to protest assessed values than small businesses would.

Am I missing something here? I prefer income tax, which is based upon the idea that people who have more ability to pay should pay more. And how has income tax failed? I'm confused.

whig said...

Businesses don't pay rent for their place of business now?

All this would do is collect the rent the landlords would have appropriated anyhow.

It doesn't have a negative economic impact because it is a tax on the value of land which everyone always pays anyhow, whether by capitalizing it and paying it outright or as a mortgage, or on term as rent. It has positive repercussions in discouraging sprawl and encouraging investment in improvement.

Obviously you aren't aware of how it has been used and the economics of land value taxation. I won't try to write a treatise for you here, there are some available.

Go read this and get back to me later.

whig said...

As for income tax. What is the current compliance rate?

Here's the result of a quick search.

There's a problem here.

Doctor Biobrain said...

First off, I'd just like to say that I'm a tad miffed that I had to do this much research just to determine that your point really didn't apply to what I was saying. In fact, assuming you're proposing what George was proposing, you're not really talking about a tax at all. You're talking about a complete overhaul of life as we know it, with the removal of land ownership; whereby the government repossess all land and rents it back to us. And that's not a tax. That's a catastrophe.

While I don't necessarily think it's a bad idea in theory, I can't imagine how this is at all feasible for us. I mean, there are people who flip-out over the idea of universal healthcare. And now you're going to suggest that the government will just steal everyone's land from them and make them pay rent to the government to rent back what they had once owned? Something tells me this might not go over so well, and would probably be met with an armed revolt. And I could see a large part of our military siding with the revolters.

But really, I've still got like a million questions regarding this, and find this forum to be perfectly dreadful for getting any answers. And seeing as how I believe there is absolutely zero chance of this becoming a reality, I don't know why I should bother. Perhaps some day we could meet over drinks to discuss this kind of thing, but slo-mo comments really are just going to make things worse.

Now, if you were just proposing something similar to the typical property tax, but that only applied to land value; I could understand that. And it looks like that is used in many places. But the idea of the government confiscating all land and making us all pay rent to them seems entirely insane. Like I said, the theory sounds good, but I think the implementation would be a disaster.

And you're suggesting we do this as a way of stopping tax cheats? That seems a tad drastic. I think I'll take the tax cheats over the armed revolt, thank you very much.

whig said...

I said:

We ought to exempt a portion for people to live on tax free, and collect the rent from corporations and foreign title holders.

Read more carefully. I'm not talking about the government taking over the land that belongs to the people, I'm talking about the people taking back their land from the corporations and foreign title holders.

whig said...

You can implement it as a property tax upon the appraised value of the land. That's perfectly fine. I don't care how you style it, this is a working, effective method of financing a government which defends those land titles.

whig said...

The point, however, is you can set the millage arbitrarily high as long as the appraisals are fairly made, and you could also set the people's exemption to a fairly high percentile and most of the land taxes would fall on the wealthiest corporations and trusts, who own most of the land anyhow.

whig said...

Those same wealthy corporations and trusts pay next to nothing in income taxes.

Doctor Biobrain said...

First off, almost all of my clients are corporations. They're all owned by one or two people (usually husbands and wives) and they're all small businesses who don't have large profit margins. Some of them lose money. Does your tax apply to them? And are you excusing partnerships from this? Some partnerships are quite large.

And what about corporations who rent from individuals? Or what about corporate franchises? Many McDonalds, Exxons, and Holiday Inns are owned by individuals and small partnerships. Do they get hit by your land tax? Sure, the name says Exxon, but it's still some dude who has to pay the taxes.

I had actually assumed that when you said "corporations" you meant "businesses", as I don't understand how we can focus a land tax solely on one type of entity. Some corporations are just a dude working out of his house. My landlord is an individual who owns houses all over town. Many of the McDonalds in Austin are owned by one family. Arthur Andersen was a partnership. Entity type doesn't say anything about size or profits.

And I fail to understand how you say that corporations own all the land. Is there some basis for that statement? I'm not necessarily doubting you, I guess. I just don't necessarily know that this is true. I'm sure that was much more true in George's day than things are now. I have several clients who own their own land; and none of them are particularly wealthy.

And this link shows that corporations paid $166 billion in income tax (after credits) in 2001, and $204 billion in 2000 (those are the last two years on the table). That hardly sounds like next to nothing and it doesn't include the amount paid in taxes from corporate dividends, capital gains, partnerships, and S-Corporation income, all of which are included on individual tax returns. BTW, 58% of corporations in 2001 were S-Corporations, so there's a lot of tax that isn't included in this number.

But what's the point? It was consumers who paid these taxes anyway. If all the corporations have to pay the same kind of tax, then they'll all pass it on to us by raising prices and we'll have no other choice than to pay. And so consumers would be paying your tax too. What's the point of that?

As for property taxes, they're not set at 99.9%. They're not even set at 20%. If this land tax was 99.9% of potential rental value, this is the equivalent of them turning everyone into renters; which is exactly what George intended. If the rate was set at 10%, it would be a standard property tax. As a reminder, land owners already pay property taxes, even on undeveloped land.

BTW, you sent me a link that was waaay too much information, so it's really not quite fair for you to accuse me of not reading, when I based my analysis on the link you gave me. I should be forgiven for not knowing your whole plan, when you haven't said what it is.

Finally, I honestly don't think you're upholding George's theory of Land Value tax at all. You're just wanting a specialized tax that makes corporations pay more. And just so you know, all public corporations are audited by outside CPA firms. So it's not as if we entirely trust them to report their own income. And because their tax returns have to tie-to their financial statements, and because public corporations have a big incentive to report high income on their financial statements; that's the incentive for them to report income. And sure, there will always be Enrons, with auditors who look the other way. But I think it works for the most part.

And this doesn't even begin to show all the questions I have about all this. Did I mention that this wasn't the proper forum for this kind of discussion?

whig said...

I'm not specially targeting anyone for tax. Just exempting a portion of land value so that people have a right to live on some land.

I'm unwilling to give an exemption to corporations and foreign owners because they have no right to live on some piece of land here.

I do not ask you to read what I linked to before you respond but what I wrote here.

Since you have said you do not consider this a proper forum, I'll just leave it at that unless you wish to correspond on the subject further.

Doctor Biobrain said...

It probably would be for the best to not continue with this, as I still don't know what you're talking about. Like I said, I've got a million questions, but it's like working in molassis trying to find out anything here. This would be far easier if we were talking in person, but debating here just doesn't work when I still have trouble grasping many basic ideas of how this would work.

I still don't know if you're specifically targeting "corporations" or if you mean all businesses. It sounds like you mean businesses, but you keep saying "corporations". And a majority of businesses are small businesses, not evil corporations.

And George was of the opinion that no one had the right to own land. I found that theory to be much more consistent, but I also find it to be much less acceptable to people. I also think it's far too drastic a solution for our current problems. Things are a lot better than they were in George's day.

So yeah, I'm fine leaving things as they are. I definitely learned something new from all this, so I guess I can't complain too much.

whig said...

I suppose I should at least answer your outstanding question, that the exempt land value goes to people means only that people have a right to a certain portion of land value and untaxed title because land is a necessity of human life. If you want to run a business out of your living space, that's fine with me. If you want to have more space, whether to live in or to operate a business, you can pay rent like anyone else.

Maybe we'll get to talk in person some time, or in another forum that is more suitable.