U.S. Credit Downgrade - Who is to blame?

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That's just it Aldeth -- you need to tax a lot of people to make any kind of significant dent. In order to really make up the current pace of spending the top 10% (~$120k and above) or more will need to have increased tax, perhaps even the top 25% (~$70k and above). And it would need to be a significant tax increase -- a 5% or even 10% increase isn't going to get us there.

A 5% increase in the top 1% is only going to net ~$48 billion. Expanding to the top 2% isn't going to double that amount, perhaps it would double if you expanded to the top 5% (or even lower). Taxing alone doesn't solve the problem -- there needs to be significant cuts in spending as well.

 

I agree Bruno, there does need to be cuts. But we need to cut where the money is, and where we won't damage our society in the process. A the same time however, taxes do need to be raised. I said this in an earlier thread, but in the 1950's the tax on the rich was 90%, so it's not like we've always been opposed to this idea of people having more of our wealth paying more of our bills. Indeed, that's the only way a capitalist society can work if we expect any sort of basic dignity in our lives (being able to retire, afford health care, not starving to death if jobs aren't available).

But like I said before, the revenue is not just in income taxes but also in where much of the wealth of the nation is being spent in for profit, like speculative markets, proprietary trading, capital gains, and other nonproductive capital. Let's look at this 600 trillion number again. If we put a simple 5% tax on speculation, we're looking at what, 30 trillion? Forgive me if my math is off. But either way that is a substantial amount of money for such a low tax, and that's only in one of the markets.

 

I can't follow what you are saying. We only tax "wealth" once and that is when you die and have to pay the estate/death tax. Personally, I have always thought that the death tax was wrong as it is basically taxing you twice (once when you earned the money and again for dying with it).

We annually tax income. Anyone who makes money in speculative markets, proprietary trading, or capital gains reports the income on their tax return and pays the tax on it. Please don't tell me you believe that there are parts of the tax code which make these types of income "tax free" to "rich people" as the fallacy that the rich don't pay taxes is just propaganda.

I've seen mention of the capital gains tax. This is another tax that should be abolished as it is plainly unfair as it doesn't take into account the time value of money. If you invest $1,000 in a stock and in ten years sell it for $1,200 you have a gain of $200 and will owe $30 in tax. Congratulations you have earned 1.8% per year on your investment (1.6% after taxes). In the eyes of most investors you have actually lost money.

 

Oh, I agree with that. I wasn't trying to imply that it was an either/or decision. I'm just saying that the amount you could gain from increasing taxes on the rich was more than the $20 billion or so dollars you said. Oh course with the national debt in the trillions, it would take centuries to catch up if you only paid it down $20 billion per year.

I have a tangentally related question that I'm guessing you'd know the answer to Snook. Many people have 401k plans. You don't get taxed on the money you place in them. But you also don't get dividends, and you also don't pay any capital gains taxes when the fund manager sells stocks (not that there have been many profitable moves to be made in the stock market recently). How does that work from a tax perspective? I cannot imagine all this money could be trading hands daily and no one is paying taxes on it. Does a different set of rules exist for this type of trading?

 

BTA is correct. All earnings are tax exempt in a 401K. You are taxed on the amount of distributions you take from the 401K.

 

damedog, what you are essentially talking about is a 5% tax on wealth (albeit a specific component of wealth, i.e. investments in the speculative market). There are several problems with that.

First off, let’s say I have $100,000 to invest. This money presumably came from income that I have previously paid tax on, so imposing a further 5% tax amounts to double taxation; you might as well just bump the tax on the income in the first place.

Secondly, with a 5% tax taken off, and assuming a 20% marginal tax rate on income (mix of interest, dividends and capital gains), I need to earn 6.6% (plus inflation) annually on the remaining $95,000 just to break even. If I’m relying on investment income to live on, I’m screwed. Now I suppose your counter to that would be to exempt a certain level of investments from the 5% tax; I would argue that level would need to be a minimum of $1,000,000 (and probably more); I would think that would reduce your $600 trillion base substantially. And that still doesn’t get away from the fact that people subject to the tax would need to earn over 6.6% on the excess in order not to lose money. One way around that would be to allow investors to reduce their taxes on earnings by the 5% tax (and I think you’d still need to exempt at least $1,000,000 of investments), but that erodes the potential tax revenue even further. And of course all of this just serves to make a complicated tax code even more complicated.

Then there’s the pragmatic side. The ones likely to be hit by such a tax are the politicians who would have to pass it, and the people who fund their campaigns. Good luck with that.

In Canada, we have had at various times taxes imposed on capital (which is essentially what you are talking about), but it only applies to large corporations (not individuals) with capital of several million dollars, and is typically less than 1%.

Not quite; you’ve only lost money if your after-tax return is less than the rate of inflation; if it’s more, then you’ve made money – just not as much as it would appear. And I could make the same argument as yours for interest-bearing investments.

 

In my quarterly statement I never see any line on my sheet for the amount my account grew for dividends or capital gains - I just see what my contribution was, my employer's contribution, and the percent increase or decrease based on that. I'm not saying you're wrong - I've already admitted I don't really know how it works - I just didn't know how they were applied. If it's just reinvested, that's fine.

Well, Roth is after-tax dollars right? So you've already been taxed on it. 401k plans are taken from pre-tax dollars. I should try to find a way to throw a few thousand a year into a Roth, but I can't quite afford it right now. I cannot stop investing into the 401k - with an 80% company match it's free money - and most of the extra is going into a college account for my son.

 

Replace the word wealth with money then. And yes, they do report their gains in those markets that are taxed from their income, but the point I was trying to make was that the real gains in revenue from those markets shouldn't come from taxing the gains from peoples income but from taxing speculation itself- like a financial transactions tax. These bets have the ability to artificially drive prices up away from the supply and demand equation, and as such represent a risk to the public as well as being a massively profitable venture. If we're going to tax the common person's income that they earned from working (aka being useful to society), than a publicly useless and risky money making scheme should without a doubt have a tax associated with it.

Splunge, some of the points you made were actually things I was going to get into more as reasons for the tax. First off, having a double tax on wealth and also on this type of investment creates a deterrent for going into those markets- incentive for investing into other things, like the productive economy. Why should we have a deterrent? Three reasons. 1) It's a risky bet with no one being served but the corporate investor and has the power to drive prices up. 2) It gives an incentive to intentionally manipulate the market being betted on for profit- like how Arcadia is being prosecuted for doing just that. 3) It has a massive capital base behind it, and even if it shrinks to half of what it is (which is a ridiculously unrealistic decrease) we're still talking about hundreds of trillions. Call it a "non productive" tax.

The fact that we even have such a situation shows the failure of capitalism and the classical economic schools in general. In Adam Smith's "The Wealth of Nations" his argument for the "free market" was that intentionally serving one's own interests serves the society as a whole. I believe the correct term for this is "unintended consequences of intended action". This may have been true at one time, but now serving ones on interests has the nasty habit of actually harming the greater society. I've talked to death on these forums about how untrue this doctrine is in the real world of economics. Perhaps a new system is the real solution?

But on the practical side- you're absolutely right. The main goal is to get money and influence out of politics, period.

 

Sheesh, and I thought Obama was a socialist.

You want to tax a transaction if it makes a profit or if it doesn't and you feel the government should tax certain transactions to prevent people from investing in them. How that is the government's or your decision to make is beyond me? What next, should people not be allowed to invest in pork bellies because little piggies are cute and Charlotte's Web is a good book?

 

Snook does have a point - when you buy a company's stock, you are investing in a private business. What you are proposing is taxing people for buying partial ownship of something. Not a sales tax, but something like an "owners tax". I don't think that's socialism per se, but definitely a significant departure from anything resembling capitalism.

Such a system would also have the affect of greatly driving up prices of whatever product or service the company produced. If the company has to spend all this extra money for it's transactions, it's not going to take that hit. It's going to pass it on to the consumers. You're worried about the current system with the corporate investor driving up prices. Your solution would ensure that is exactly what would happen.

 

*Gasp* That dreaded word. Sheesh, economics is about as sensitive as religion now.

How is it our governments decision to make? Simple, I go to the Constitution, where it says one of the jobs of government is to "promote the general welfare". Or the general welfare clause if you want a more legally defenseable position. Speculation, like i've said multiple times, can raise prices without there being any change in supply and demand, hence the people buying these products (and oil and food are things everybody buys, things that have been previously and still hurt by speculation) are losing money as collateral damage due to the financial policies of these institutions.

Is this a radical idea? No. That is why our government makes regulations in the first place. If you disagree with the government interfering in the workings of buisness, than make them take the laws off of interest rate changes they have on credit cards and loans. It's their right to charge whatever they want, when they want, right? And forget workers comp. It was your decision to work in that environment, why should it fall to the buisness to take care of you if you mess up?

In all such situations government interferes in the working of buisness. Child labor, environmental laws, minimum wage. These things are all for the general welfare, why should another threat to our economy and livelihoods be any different?

You would be right Aldeth, that is exactly what they would do if it was every buisness in an entire sector of goods or services that was doing it, which is actually not the case except in the case of the major banks. In that instance, I would say there should be regulation in place to not allow this in the banks that were bailed out by our tax dollars. We're a major shareholder, no? We should be, in capitalism's terms, the ones with that rightful say.

 

The Tobin tax. My economics professor actually is a big supporter of the Tobin tax but for different reasons I think. He thinks a 1% tax on the investment should be used to shrink the credit sector and cool down any potential psychological shocks and calm down the markets. For long term investors a 1% is a very little sum that they only have to pay once. Its main target would be to eliminate high frequency trading and speculative investments in order to reduce the amount of economic transactions to actually reflect the demands of the real economy. This would probably drive away some actors from the banking sector but his opinion is that it would not be a major loss since banks or hedge funds that exist only to make short-term profits through speculation do not benefit the real economy in any way and on the contrary damage real growth by distorting business cycles of the real economy. The current economic turmoil for example has no basis in the real economy. It's a 100% financial bubble.

EDIT: We also used to have a wealth tax in Finland but quite frankly it was inefficient since it did not include a lot of investments like stocks. It was basically easy to evade it by investing your wealth instead of hoarding money or buying real-estate, cars or boats for your own use (apartments you rented for others were investments and excluded from tax).

 

That's exactly one of the points I was trying to make, although I think 1% simply isn't enough to stop the dangers in the economy. The profit margins they stand to gain are giant compared to that so it's really not a deterrent at all. It's similar to the study that said a few percent increase on the estate tax in a single state simply wasn't enough to have to bother with moving. It's more politically feasible in the current distorted political climate for sure, but the profit motive there is too strong for such a small number to work.

Taxes on speculation should be different for the length of time it takes for you to collect on your bet. Short term speculation should be taxed more because, as I understand it, it is more dangerous than long term.

 

Actually, after reading Morgoroth’s post, and re-reading damedog’s, there’s actually a reasonable basis for imposing a tax on the purchase of an investment security. Think of it as a type of sales tax – I pay a tax on any number of goods and services I purchase, so why not on securities? Granted, the items that I pay taxes on now aren’t intended to make me money, whereas securities are (and therefore my return is reduced), so the tax would need to be considerably less than what I expect to make, but a nominal tax (1% or less) could have the effect Morgoroth describes. I’m not saying I’m in favour of such a tax, but I’m not necessarily opposed to it either, and I can certainly see an argument for it.

 

Now you are starting to make some sense. IMHO the courts screwed up very badly by allowing the general welfare clause to basically allow the government to do anything it wants. Yes, the government has no business telling credit card companies how much they can charge in interest. Forcing them to disclose what is going on I don't have a problem with.

Workers compensation is a bad example. If there weren't laws forcing employers to have it they would be forced to buy it anyway by the banks and investors. Nobody wants to risk a company going belly up because of an injured employee. Workers compensation in most cases is for the employer's protection, not the employee.

As to your other points it sounds like you are reading from the "union playbook". We don't need the government (or the unions) telling us that ten year olds can't work in coal mines anymore. By the same point we don't need them to tell us not to pour dioxin into the drinking water. In both cases public opinion and the lawsuits would wipe out anyone doing any such thing.

One last point on the speculation point. It would never pass as the Democrats need George Soros's money very badly.

 

So if the relatively few credit card companies find it is in their best interest to compete only on small fronts so as to ensure high profits, controlling the market by their combined power to act in almost the same way as monopolies do, that is all right? 3 companies with 65 to 70 percent of market share creates inordinate power to prey on consumers.

http://www.economicsonline.co.uk/Business_economics/Oligopoly.html

Go to the "interdependence" and "strategy" sections, and tell me that it isn't in their best interest to collude and raise prices. These are agreed upon behaviors of such markets. But if you don't believe in the fundamental principle of doing what is best for the general populace at large, i'm not quite sure where you stand. Even the greatest spokesmen of free market style capitalism argue that it's what's best for everyone.


You also put too much trust in public opinion. Look at all the polls you can find for every issue and look at what we actually get from our government, especially in the big issues, and tell me that there isn't a massive disconnect that can't even be defended because of facts on most fronts. I call it a democracy in form but not in function. Besides, the very thought of your child not having to work to support the family only became feasible because of the economic gains brought about by unions. But i'm not specifically pro-union, only in cases where it legitimately increases the livelihoods of workers and lets them live a life with some basic dignity and fairness. I understand that some things may be a burden on buisness that unions ask for, like pensions, but unless this is a true threat to the long term sustainability of the company (an issue that should be solved by numbers rather than opinions) than I am in support of it as a basic right of a just social contract. I guess that makes me pro-union in some eyes, but it's never been a thing i've really focused on.

But i'm not going to defend the analogies, since they aren't part of my original argument, and ignore the attempt at discredit by association. If the analogies aren't perfect, what's your actual problem with my line of reasoning?

 

As to having large credit card companies making whatever rules they want to, you have to remember that they are not holding a gun to your head and making you buy things using their "credit". Also when the bill comes it is up to the customer to determine how much to pay. If they pay their entire bill the interest rate can be 100% and it wouldn't matter as the customer would pay $0 interest.

As to child labor/unions the issue is that everything had a time and a place. Unions did great work for society when they needed to, but their time has passed. We don't need buggy whips anymore either.