tax


The cliff.

JPMorgan Chief U.S. Economist Mike Feroli believes small, periodic increases in a national sales tax, combined with parallel reductions in other taxes, would permanently right the ailing economy.

Here’s his idea in full: needless to say, I’ll have some comments later.

“One crazy idea I like is to institute a series of periodic, small increases in a national sales tax. This would have the effect of creating deeply negative real interest rates by increasing the incentive to pull forward demand into the current period when it is less expensive. To offset the disposable income drag it would need to be coupled with equal and offsetting decreases in income and other taxes. This idea has been kicked around by mainstream economists (Feldstein, Kocherlakota, etc.) and nobody has been able to poke any major theoretical holes in the argument, but at the same time people realize it is a politically tough sell, so it has remained in the realm of obscure academic journals even though it is a guaranteed demand igniter.”

Her resume appears at the end of the piece, for those who know, she requires no introduction.

By CHRISTINA D. ROMER
Published: March 17, 2012

AT least since Calvin Coolidge, politicians have trumpeted the supply-side benefits of cutting marginal income tax rates. Lower rates will unleash economic growth and the cuts will largely pay for themselves — or so it’s often said. Yet careful studies find little evidence of such effects. Perhaps it’s time to reform tax policy based on facts, not worn-out assumptions.

Here we have the perfect example of the scientific methodology of the physical sciences, trying to be applied to the social sciences, of which economics, or rather econometrics is the scientised version. This empirical methodology is incorrect.

A family’s marginal tax rate is what its members pay to the government if they earn another dollar. If the government takes a smaller chunk of that dollar, a family has more incentive to earn it. Workers may choose to work additional hours, or a stay-at-home spouse may decide to work outside the home. Likewise, entrepreneurs may invest in a new enterprise or expand an existing one. Lower marginal rates also reduce people’s incentives to shield income from taxes, through legal and illegal means.

The marginal tax rate is correctly defined. Assumptions on the actions of individuals are just that, assumptions, as likely to be right as wrong. As such, the empirical method is immediately doomed to failure: one set of individuals may do “X” the next set “Y”, with the first set switching to “Y” next time round. Wrong methodology.

The main question is whether these incentive effects are large. If they are, cutting marginal rates could cause a sustained surge of hard work and entrepreneurial activity — and thus reported income. This idea was the essence of President Ronald Reagan’s theory of supply-side economics, and his justification for large, permanent tax cuts in the early 1980s. Mitt Romney, now seeking the Republican nomination for president, cited a similar argument when he proposed cutting all income tax rates 20 percent.

The answer lies in ‘diminishing marginal utility’ and ‘time preference’. All individuals will allocate their money into cash balances, consumption spending and saving/investment. These ratio’s may fluctuate, in fact, you can say that they will fluctuate, depending upon changed and changing circumstances.

What then, what set of conditions, would increase the saving/investment proportion relative to cash balance holdings? [i] An increase in the purchasing power of money. If money held, increased it’s purchasing power, less of a reserve would need to be held to accomplish the same ends. The spare, or surplus, could now either be saved/invested, or consumed.

Even if the decision was to consume, viz. higher time preferences, diminishing marginal utility’ would limit this consumption spending in all but the poorest, who essentially have to spend all income just on necessities to survive.

For the rest, surplus money, would now be saved/invested, a lowering of time preferences, which would do three things: [i] lower the market rate of interest through lowering the natural rate of interest [ii] thus promoting longer, more roundabout production methods [iii] which increase supply, thus lowering nominal and real prices [iv] which again increases the purchasing power of money, thus reinforcing the virtuous cycle.

If the incentive effects are small, however, the situation is very different. Cutting taxes would still raise output for a while by putting more money in people’s pockets, and so increasing their spending — a temporary demand-side effect. But lower marginal rates wouldn’t greatly raise output over the long haul through the supply side.

Romer has considered only a single possibility, and just assumed this case will hold. That is simply incorrect.

History shows that marginal federal income tax rates have varied widely.

An empirical time series data. A historical fact pertaining to the individuals and circumstances that pertained uniquely to them. Empirical data have no predictive power, much as the econometric’s wish that they did.

Since World War II, the top rate has ranged from less than 30 percent (at the end of the Reagan presidency) to more than 90 percent (throughout the Eisenhower years). The 1964 Kennedy-Johnson tax cut significantly reduced the typical marginal rate paid by American families, but rates rose greatly over the next 15 years as inflation pushed people into higher tax brackets. Rates fell sharply under President Reagan, rose under President Bill Clinton and fell again under President George W. Bush.

And who created that inflation? Why government. Inflation, after all, is nothing more than a tax that is hidden as much as possible from view. Pure theft.

If you can find a consistent relationship between these fluctuations and sustained economic performance, you’re more creative than I am. Growth was indeed slower in the 1970s than in the ’60s, and tax rates were higher in the ’70s. But growth was stronger in the 1990s than in the 2000s, despite noticeably higher rates in the ’90s.

First, what taxes are we referring to? Corporate tax or individual tax? What drives growth? Savings, which are investment. The nineties saw unprecedented investment in the US stockmarkets through individuals. Investment in common stocks is investment, which drives more roundabout production and increased supply. The investment was driven by a paradigm of technology creating a new era. Let’s look at further data.

It can be seen that the trend in ‘income tax’ the tax that us poor slobs have to pay, was trending lower. Yes the tax was higher in the 2000’s, but it was lower than 70’s & 80’s. In addition capital gains taxes were falling, driving investment in risk assets. The whole story spun by Romer, is designed to mislead.

The government, has systematically shifted the tax burden, not only in marginal rate terms, from the corporation to the individual, who it must be said, has far less opportunity to shield his tax obligation than does the corporation.

Of course, many factors affect the economy, so a lack of correlation doesn’t prove that marginal-rate changes have little impact. That’s why economists have devoted thousands of pages in journals to testing the effects more scientifically.

Of course, and they are called individuals. On aggregate, time preferences drive the consumption, hoarding & saving/investment decisions. The higher the tax rate, the higher time preferences have to go, as you remove money from individuals thus forcing an adjustment in their diminishing marginal utilities.

ONE standard approach is to look for natural experiments in the tax code. Often, a law changes the marginal rate for one group and not others. For example, the 2001 Bush tax cut lowered marginal rates sharply for married couples with taxable incomes of around $50,000, but did little to rates for couples earning slightly less. Using household survey data, economists can compare the behavior of taxpayers whose rates did and didn’t change.

Change the groups via a different time period and conditions and you can alter the result. Econometrics is simply untenable as economics.

A useful summary measure of such changes’ supply-side effects is the sensitivity of reported income to marginal rates. If people work and invest more in response to tax cuts, their reported income will rise when marginal rates fall.

If their marginal tax rate falls, they will earn the same, just keep more of it. After that it is all conjecture. Some might, some might not. What is important are individual allocations proportionally, to their time preferences.

True supply-siders believe that this sensitivity is well over a value of 1, implying that cuts in marginal rates raise reported income enough that government tax revenues nevertheless rise. But a critical review of several natural-experiment studies concluded that the best available estimates of this sensitivity range from 0.12 to 0.40. The midpoint of the range, 0.25, implies that if the marginal tax rate for high earners decreased from its current level of 35 percent to 28 percent (which Mr. Romney proposes), reported income would rise by just 2 1/2 percent.

Again, change the group, change the circumstances, and you potentially change the result. One simple example should suffice: the expectations of the individuals, and thus their planning of desired ends – can totally change the results.

The fact still remains: increase taxes, you increase time preferences. You have to, there is no alternative as you alter the diminishing marginal utility of money. Only those who retain surplus income past consumption and cash balances can allocate to saving/investment. The higher the marginal rate, the smaller that group.

In a new study, David Romer and I found that changes in marginal rates in the 1920s and ’30s had even smaller effects. (Mr. Romer is my husband and a colleague at Berkeley.)

Different time period, different individuals. I like the appeal to authority, viz. we work at Berkley, therefore we must be smart. Not half as smart as you think old girl.

The rate shifts in that era make those after World War II look tame, and varied greatly across income groups. The Revenue Act of 1935, for example, raised marginal rates on the very highest earners to 79 percent from 63 percent, but barely raised rates at all for those below the top one-fiftieth of one percent of households. (Now that was class warfare!)

That may well be true, but look at the increase in the tax base of individuals now required to file a tax return.

We found that an increase in marginal rates on an income group leads to a decrease in its reported taxable income relative to other groups. Indeed, because the variation is so large, the effect can be pinned down much more precisely than in most postwar studies. But the estimated impact is very small — almost at the bottom of the postwar studies’ range. One likely reason is that the tax system between the two world wars was very simple — all the instructions and tax forms for the personal income tax fit on just six pages. As a result, there were few legal methods of shielding income.

She raises two points here as a result of her studies: [i] that an increase in marginal rates on an income group reduces taxable income [ii] the estimated impact is small. Then a reason, simple tax code legislation. The entire paragraph says what?

Where does this leave us? I can’t say marginal rates don’t matter at all.

Of course not. They do. They alter time preferences for individuals.

They have some impact on reported income, and it’s possible they have other effects through subtle channels not captured in the studies I’ve described.

Indeed they do. You can’t measure them at all. All that you can observe is the historical outcome that the time preferences of individuals resulted in. They are predictive in stating that, the higher the tax rate, the higher the time preference has to be. This will result in lower proportionally, savings/investment. Lower investment results in lower production and lower supply, which means that prices will remain higher than they otherwise would.

But the strong conclusion from available evidence is that their effects are small. This means policy makers should spend a lot less time worrying about the incentive effects of marginal rates and a lot more worrying about other tax issues.

Nonsense.

Most obviously, the federal budget is on a collision course with reality. Reining in the long-run deficit will have to involve slowing the growth rate of spending. But unless we choose to gut Medicare and Medicaid, additional tax revenue will be needed. This essential truth is the No. 1 factor that should be driving tax policy. And anyone who tells you that the way to raise revenue is to cut marginal tax rates is arguing from ideology, not solid evidence.

Government revenue. But really, who cares about government revenue. Government needs to cut spending, not concern themselves with raising additional tax revenue. I note she mentions the two scary, and with a political demographic in mind, Medicare & Medicaid, add to that Social Security, and you have the so called third rail of American politics.

Many people have proposed raising revenue by cutting back on deductions and loopholes — so-called tax expenditures. Indeed, all else being equal, such changes are preferable to raising marginal rates. After all, higher rates do have some disincentive effects. Eliminating special tax provisions would also simplify tax preparation, and give people less incentive to try to game the system.

Higher rates lower production. That is bad. End of story.

But if moderate increases in marginal rates wouldn’t much affect behavior, a mix of rate increases and cuts in tax expenditures might be a sensible path.

Increases in tax always effect a change in time preferences higher. Fact. Cutting government spending is the only viable way forward.

Some tax expenditures, like the favorable tax treatment of employer-provided health insurance, may have worrisome effects (by encouraging overly generous plans) and so should be trimmed. But others, like deductibility of charitable giving, may be worth keeping.

All rules that prevent, or shield income from tax must be kept, although the two mentioned still result in less income to the producer. The government has still forced a redistribution.

Finally, income inequality has surged in recent decades.

Yes it has. There is a good way and a bad way. If I as a producer supply a product or service that individuals demand, I provide a service, and am rewarded for my foresight. In this, if my income rises, that is for the good.

When you income rises due to incompetence, dishonesty, bailouts at the expense of the taxpayer, well that is something else entirely. That is why the banks are so universally despised currently. It would be hard to find another group of individuals who are as corrupt, greedy and plain fucking stupid, than the bankers.

Raising marginal rates on the wealthy is a straightforward, effective way to counter this trend, while helping to solve our looming deficit problem.

Incorrect. All you succeed in doing is altering the final group’s time preferences from saving/investment to horading and consumption. Rather, you lower taxes to expand the saving/investment choice to a larger base of individuals.

Given the strong evidence that the incentive effects of marginal rates are small, opponents of such a move will need a new argument. Invoking the myth of terrible supply-side consequences just won’t cut it.

Your evidence, proves nothing.

Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.

Which is what makes this so scary. That such an incompetent fool was responsible for driving policy, truly, is terrifying. That she may, or may not still have political influence, well, let’s hope not.

Never a meaningful cut in spending, just higher taxes. Clueless.

• Top individual income tax rate of 39.6%, starting in 2013 (up from 35%)

• Long- term capital gains top rate of 20%, up from 15%.

• 3.8% tax on unearned income of couples earning $250,000 or more; individuals making$200,000 — is to take effect in 2013 to pay for the 2010 health- care reform law.

• Dividends are treated like ordinary income. Top Federal bracket for some taxpayers = 43.4% (including dividends). Top dividend tax rate is now 15%

• The AMT is replaced with a 30% minimum tax for individuals with annual incomes of at least $1 million.

• The Carried Interest option benefiting hedge fund managers and private equity managers moves to ordinary income rates instead of a preferential 15%

Unbelievable. Totally.

From Americans for Tax Reform:

The capital gains rate will rise from 15% today to 23.8% next year. That’s because the Obama budget assumes the pre-2001 capital gains rate of 20% for investors earning more than $250,000 per year. On top of this, the Obamcare surtax on investment will raise this rate to 23.8%. Separately, capital gains earned as “carried interest” will be taxed at ordinary income tax rates.

The dividends rate will raise from 15% today to 43.4% next year. The Obama budget proposes taxing dividends for investors making more than $250,000 per year at ordinary income tax rates, which will rise to a top rate of 39.6% under the budget. In addition, the Obamacare surtax on investors will combine to nearly triple the tax rate on dividends in just one year.

The real tax rate on capital gains and dividends is actually even higher than this. Since taxes on dividends and capital gains are a cascaded double taxation on savings, the rate is actually far higher than this. Before being taxed to investors as capital gains and dividends, the money first faced taxation as corporate profits. The U.S. has the highest corporate income tax rate in the developed world at 35%. When factoring this in, the Obama budget is actually proposing a capital gains tax rate of 50.5% and a dividends rate of 63.2%. That would leave U.S. employers and savers at a severe competitive disadvantage.

Taxes that are set to expire: from the Wall St. Journal.

The WSJ takes a look at a variety of taxes that are about to expire year end, the expiring tax cuts of 2012, and what new taxes go into effect or expire in 2013:

Expiring in 2011
• 2% Social Security payroll-tax cut for employees
• Alternative minimum tax patch
• IRA charitable contribution for people older than 70½.

Expiring in 2012
• Bush tax cuts of 2001 and 2003.
• top tax rate on wages reset to 39.6% from 35%
• top rate on long-term capital gains to 20% from 15%
• Special 15% rate on dividends
• estate-tax provisions.
• 10 million lower-income families and individuals restored to the tax rolls

When you increase taxes, government raises the time preference of all those whom it taxes. This reduces production, in that the longer, more roundabout production methods must be abandoned, with shorter, less productive methods employed. Not only is production lowered, but also the employment that results from the longer processes.

Thereby government, through it’s gross mismanagement of its own spending, viz. running current account deficits, exceeding the borrowing ceiling, prosecuting wars that it cannot afford, requires increased taxation, in part simply to service the interest payments on already incurred debt, so that it forces the higher time preference onto individuals and the general economy.

Clueless.

This is one of those WTF posts.

AS an economic historian who has been studying American capitalism for 35 years, I’m going to let you in on the best-kept secret of the last century: private investment — that is, using business profits to increase productivity and output — doesn’t actually drive economic growth. Consumer debt and government spending do. Private investment isn’t even necessary to promote growth.

Really? I always like to see an argument start with an appeal to the ‘White Coat’ syndrome. I’m the expert, the authority, what I say must be correct.

This is, to put it mildly, a controversial claim. Economists will tell you that private business investment causes growth because it pays for the new plant or equipment that creates jobs, improves labor productivity and increases workers’ incomes. As a result, you’ll hear politicians insisting that more incentives for private investors — lower taxes on corporate profits — will lead to faster and better-balanced growth.

Even the neo-classical half-wits tend to agree with this.

The general public seems to agree. According to a New York Times/CBS News poll in May, a majority of Americans believe that increased corporate taxes “would discourage American companies from creating jobs.”

So far, pretty much everyone.

But history shows that this is wrong.

Does it now? Where is the empirical evidence that you purport evidences your case?

Between 1900 and 2000, real gross domestic product per capita (the output of goods and services per person) grew more than 600 percent. Meanwhile, net business investment declined 70 percent as a share of G.D.P.

This is the classic case of ‘post hoc, ergo propter hoc’.

What’s more, in 1900 almost all investment came from the private sector — from companies, not from government — whereas in 2000, most investment was either from government spending (out of tax revenues) or “residential investment,” which means consumer spending on housing, rather than business expenditure on plants, equipment and labor.

In other words, over the course of the last century, net business investment atrophied while G.D.P. per capita increased spectacularly. And the source of that growth? Increased consumer spending, coupled with and amplified by government outlays.

The architects of the Reagan revolution tried to reverse these trends as a cure for the stagflation of the 1970s, but couldn’t. In fact, private or business investment kept declining in the ’80s and after. Peter G. Peterson, a former commerce secretary, complained that real growth after 1982 — after President Ronald Reagan cut corporate tax rates — coincided with “by far the weakest net investment effort in our postwar history.”

President George W. Bush’s tax cuts had similar effects between 2001 and 2007: real growth in the absence of new investment. According to the Organization for Economic Cooperation and Development, retained corporate earnings that remain uninvested are now close to 8 percent of G.D.P., a staggering sum in view of the unemployment crisis we face.

So corporate profits do not drive economic growth — they’re just restless sums of surplus capital, ready to flood speculative markets at home and abroad. In the 1920s, they inflated the stock market bubble, and then caused the Great Crash. Since the Reagan revolution, these superfluous profits have fed corporate mergers and takeovers, driven the dot-com craze, financed the “shadow banking” system of hedge funds and securitized investment vehicles, fueled monetary meltdowns in every hemisphere and inflated the housing bubble.

Why, then, do so many Americans support cutting taxes on corporate profits while insisting that thrift is the cure for what ails the rest of us, as individuals and a nation? Why have the 99 percent looked to the 1 percent for leadership when it comes to our economic future?

A big part of the problem is that we doubt the moral worth of consumer culture. Like the abstemious ant who scolds the feckless grasshopper as winter approaches, we think that saving is the right thing to do. Even as we shop with abandon, we feel that if only we could contain our unruly desires, we’d be committing ourselves to a better future. But we’re wrong.

Consumer spending is not only the key to economic recovery in the short term; it’s also necessary for balanced growth in the long term. If our goal is to repair our damaged economy, we should bank on consumer culture — and that entails a redistribution of income away from profits toward wages, enabled by tax policy and enforced by government spending. (The increased trade deficit that might result should not deter us, since a large portion of manufactured imports come from American-owned multinational corporations that operate overseas.)

We don’t need the traders and the C.E.O.’s and the analysts — the 1 percent — to collect and manage our savings. Instead, we consumers need to save less and spend more in the name of a better future. We don’t need to silence the ant, but we’d better start listening to the grasshopper.

James Livingston, a professor of history at Rutgers, is the author of “Against Thrift: Why Consumer Culture Is Good for the Economy, the Environment and Your Soul.”

The case that is presented is very weak. First and foremost, how does ‘production’ actually take place? This is important as the good Professor cites GDP growth as the ‘marker’ of progress. The Professor makes his case that it is ‘spending’ that drives GDP growth.

1900 and 2000, real gross domestic product per capita (the output of goods and services per person) grew more than 600 percent. Meanwhile, net business investment declined 70 percent as a share of G.D.P.

Consumer spending is not only the key to economic recovery in the short term; it’s also necessary for balanced growth in the long term. If our goal is to repair our damaged economy, we should bank on consumer culture — and that entails a redistribution of income away from profits toward wages, enabled by tax policy and enforced by government spending.

We have a major contradiction in the reasoning before we even start to refute the argument. It is this: if ‘spending’ consumer or government is the ‘cure’ what exactly are they going to purchase? Manufactures have to be produced to be consumed. Without ‘production’ there is no consumption. This is of course the basis of Say’s Law: that production creates its own demand.

Then we have the distinction between ‘profits’ and ‘wages’ which sounds like the neo-classical argument that the value of production lies in the ‘labour’ component. This is also a specious and false argument.

His second argument is an ethical argument:

A big part of the problem is that we doubt the moral worth of consumer culture. Like the abstemious ant who scolds the feckless grasshopper as winter approaches, we think that saving is the right thing to do.

This again can easily be refuted. I note that even the parable of the ant and grasshopper underlies the economic truth that it is ‘saving’ that creates security. So now let’s move forward and present the correct position in his three areas of contention.

First and foremost it must be stressed that in economics and other social sciences, it is not the ‘inductive method’ that has primacy, rather it is the ‘deductive method’ for the reason that in human affairs all causation is already known: viz. it is ourselves. Thus knowing the causation, we simply need to start from an axiom and deductively progress forward, resulting in truth statements. The theory is thus irrefutable. No amount of empirical evidence can gainsay true theory, not that the Professor has actually demonstrated any other than his ‘post hoc, ergo propter hoc’ logical fallacy.

I start with production. For any production, the best method will be chosen. This will include the most up-to-date technology available. In addition the factors of production will be applied and mixed in the optimal fashion: land, labour and capital. The goal will be to produce the most ‘output’ at the minimum ‘input’. The last factor not mentioned in the ‘triad’ is time. The timeframe chosen will be the ‘shortest’ possible timeframe. This underlines the law that ‘present value’ is higher than ‘future value’.

From this we can state that any improvement in the ‘output’ must require a change in the inputs: land, labour, capital and time. Technology is usually quoted as being the most important factor. Technology is important, however it is not the critical factor, which can be illustrated by way of an example: Africa could have access to the technology of the ‘West’ but, without capital, no progress in production can or will take place. It is capital that creates the ability to produce.

As already stated, the ‘shortest’ time period will have been chosen, the most efficient productive process. Thus to increase ‘output’ even adding or subtracting other ‘input’ factors, there must be an increase in the time required to produce. Thus increased output requires additional time, or a longer waiting period for an increased ‘output’ to be produced.

Therefore our increased output results in an aggregate falling time preference amongst consumers. Thus the ‘originary rate of interest’ must fall, signaling the falling time preferences of consumers, who make available increased quantities of capital goods to be transformed into the higher ‘output’ of the longer production period.

Which brings us to the crux of the fallacy that government spending can promote, and is de facto responsible for increased ‘output’. Government spending needs to be defined. How do we separate government spending into ‘consumption spending’ and ‘investment spending’? Simply through an examination of the ‘revenues’ accruing to government. Investment spending will result in ‘investment income’ and consumption spending shortfalls will need to be financed through taxation. Therefore we can examine the empirical data to establish the type of income that government has generated.

Government receipts, unfortunately do not differentiate between investment income or tax income. We can however inspect the historical record to establish greater clarity on the matter.

We can see that government essentially runs at break-even or a loss. There is no surplus to speak of. In addition to ‘revenues’ the government has debt. This debt, if invested in ‘productive assets’ would earn a return in excess of the ‘cost’ of the debt.

Even with all the debt and deficits, the liabilities require still further income to service the total.

Essentially then all government spending is serviced via taxation. Direct taxation via ‘income tax’ or indirect taxation via debt, which implies higher future taxes, or ‘inflation’ viz. money creation to devalue the debt burden. Thus we shall examine the theory of taxation with regard to the professors assertion that government spending via taxation, is the creator of increased production, which is the requirement to create wealth.

Through taxation government has increasingly destroyed the fundamental base upon which capitalism builds wealth. Taxation is as this post proves, illegal. In addition to being illegal, taxation also possesses these rather unfortunate traits: [i] increase unemployment [ii] reduce productivity. Both these together result in decreased [wealth] production.

It is not the ‘type’ of taxation that is important, rather it is the ‘total’ taxation burden that is critical. Taxation takes numerous different forms: [i] income tax [ii] inflation [iii] consumption tax [iv] subsidies [v] tariffs [vi] capital gains tax [vii] patents [viii] copyright [ix] minimum wages and [x] debt

Taxation is a ‘cost’ to the producer that is paid to government as tax revenue. This payment must be made in ‘present value’. By reducing the sum total of present value capital goods, the ability to engage in the allocation of present value capital goods to future value capital goods is reduced. Thus production through the raising of ‘time preferences’ will be reduced in the future, thus reducing supply, thus raising prices in consumer goods and services.

Through a reduction in future production, the employment that would have been created, now is not. If taxes are raised, then productive capital that ‘was’ profitable can be made ‘unprofitable’ and thereby creating unemployment. As I survey the data, the theoretical a priori of taxation becomes starkly apparent.

This is the contradiction. Taxation increases the consumption in ‘present value’ and thus by definition raises time preferences higher. To increase production, the opposite must occur: viz. time preferences must be lowered. QED.

With the increasing perception that government has no answers to the economic crisis, follows the increasing awareness that government is also the cause of the current economic crisis.

Through taxation government has increasingly destroyed the fundamental base upon which capitalism builds wealth. Taxation is as this post proves, illegal. In addition to being illegal, taxation also possesses these rather unfortunate traits: [i] increase unemployment [ii] reduce productivity. Both these together result in decreased [wealth] production.

It is not the ‘type’ of taxation that is important, rather it is the ‘total’ taxation burden that is critical. Taxation takes numerous different forms: [i] income tax [ii] inflation [iii] consumption tax [iv] subsidies [v] tariffs [vi] capital gains tax [vii] patents [viii] copyright [ix] minimum wages and [x] debt

Taxation is a ‘cost’ to the producer that is paid to government as tax revenue. This payment must be made in ‘present value’. By reducing the sum total of present value capital goods, the ability to engage in the allocation of present value capital goods to future value capital goods is reduced. Thus production through the raising of ‘time preferences’ will be reduced in the future, thus reducing supply, thus raising prices in consumer goods and services.

Through a reduction in future production, the employment that would have been created, now is not. If taxes are raised, then productive capital that ‘was’ profitable can be made ‘unprofitable’ and thereby creating unemployment. As I survey the data, the theoretical a priori of taxation becomes starkly apparent.

The historical origin of the ‘income tax’ imposed ostensibly on a ‘temporary’ basis, has of course never looked back.

Government ‘spending’ as against revenue.

Government has no ability, other than taxation to create revenue. Thus the spread twixt government spending and revenue is always the difference that must be made up via taxation. Therefore the $1.3 Trillion shortfall will be made up through a form of taxation, or a combination of taxes to better hide it.

Currently the bulk of the taxation is being passed off as an increase in public debt.

The ‘total’ debt has exploded to $14.8 Trillion from $5.7 Trillion in 11yrs. That is a 9.06% compounded growth. It is only that ‘interest rates’ are at all-time historic lows that the government for the moment are maintaining the illusion. Make no mistake, this is a tax that is being paid by the majority. The debt you see is only just being ‘managed’ through inflation. Inflation or money + credit creation reduce the purchasing power of the ‘fiat money’ in our pockets. We thus pay the ‘tax’ through the ‘monetization’ of the public debt via the Federal Reserve banking system.

The taxation that has been imposed on society has increased relentlessly. Government being tax consumers have increased their level of expropriation and theft since the Presidency of Roosevelt. Socialism became the political ideology of America in that era and has derived its nourishment from the parasitical feeding off of the property of capitalism.

The big lie, that government provides and affords protection, is given through the massive increases in taxation to provide this protection or defense. The defense has taken the form of spending on war. Observe the data for WWI and WWII and currently for Iraq/Afghanistan.

The expansion of the ‘minimum wage’.

Having looked at some of the ‘taxes’ that are paid, what are the results of this higher and growing level of taxation?

On productivity:

Capacity utilization is a good estimation of fixed capital goods that have had capital invested, that now due to increased costs, have become uneconomic or unprofitable, and are thus left unused. The trend has been negative for decades. The increased costs are the costs of taxation imposed upon the ‘private’ sector by the ‘public’ sector.

Government employees pay no income tax. When you or I [unless you happen to be a government employee] earn a wage or salary, it is because we have created value. We are then taxed on this value, thereby reducing our store of present value goods. Government employees are the recipients of this expropriation and theft. Their salaries are ‘tax free’. Consider this: if all taxes were removed, you and I would earn our value product and gain by the tax that we once paid. Our government employee would be paid how? Without tax revenue, he receives no wage, as he produces nothing. What is the burden?

The problem with Western economies are summable in a word: government. The expansion of ‘leviathan’ is consuming, and has likely consumed the inherited wealth in capital and capital goods that we gained from the era of ‘liberalism’ and capitalism that dated from the late 1700’s through to the early 1900’s. That 200yrs of wealth production has been expropriated by government, particularly under the insidious propaganda of ‘democracy’.

NEW YORK (CNNMoney) – Companies have yet another reason not to boost hiring: rising unemployment taxes.

Employers around the nation are getting socked with higher state unemployment tax bills as states are forced to shell out more than $1 billion in interest payments this month. More than 30 states have had to borrow billions from a federal fund to cover unemployment benefits for their jobless residents in recent years.

And this is only the first of two tax spikes employers are contending with, on both the state and federal level. Come January, companies in 24 states could have to shell out between $21 and $63 more per employee in federal unemployment taxes.

These hikes are the latest in a series of unemployment tax increases as states look to replenish their unemployment trust funds devastated by the Great Recession.

Last year, employers paid 27.8% more in state jobless taxes, said Doug Holmes, president, UWC Strategic Services on Unemployment & Workers’ Compensation, a business trade association.

“Unemployment taxes, which were a relatively low bottom-line cost in 2008, are now becoming a significant cost,” Holmes said. “It discourages companies from electing to hire new employees.”

I have previously written a proposal for a Community Land Value Tax for the Scottish Parliament. I reproduce it here as originally written. I would probably change some of it now, but it contains the main elements of the case.

Dr.D, not only are you an apologist for government, you are actively trying to promote further taxes upon us.

Proposal for a Community Land Value Tax

Diarmid Weir

1 Introduction

It was Marx who saw that the unequal distribution of ‘private property’, in particular land, was incompatible with social justice. Yet we have also seen from the former communist states that centralised ownership of land and the resources it produces brings a different sort of tyranny.

Social justice is a term that you [the reader] may need to become familiar with, as it will have great bearing on the various arguments. I’ve used the wikipedia definition.

Land as fundamental property
In these days of highly manufactured technology it is very easy to lose sight of the importance of land. Look at any product of this technology, however, and we will find that it is composed of materials extracted from the earth’s crust, from crops grown from it or animals husbanded upon it. So land is the fundamental ‘property’ and all other material goods are derived from it. Social justice therefore demands some way of making the control of its use communal and democratic.

The point of contention here is that social justice presupposes egalitarianism. How you define this, and more importantly, how you get there, have tremendous importance. Dr.D advocates some form of communal ownership, that is based upon some form of democracy, which will necessitate government intervention into the free market, distorting the free market allocation of land.

The control of land
But what does ownership of land really mean? For land is not mobile, it does not come in discrete packets (apart from islands) and in its vertical extensions, above and below ground, has properties that are out of the control of its ‘owner’.

Disagree. The land that is owned, entitles property rights over the land, and the mineral resources lying below the surface. Property rights extending into the airspace are a little more complicated, but can essentially be resolved by allowing use of the airspace that does not damage my property rights. For example radio waves that pass through my property do me no harm, and do not impede the use of my property, therefore are allowed. However the setting up of a rifle range that fires across my property, clearly impedes the use of my property and poses direct danger to me and mine.

Even the surface of the land is not totally free for its owner to do with it as he wishes, in the way that he can with other possessions. Mineral extraction rights are often retained in a sale,

If that constitutes part of a contract, that both parties have agreed to, then there are no issues.

development may be restricted by planning controls,

Which is government intervention into the free market.

and consideration has to be given to pollution of air or water.

This issue has already been argued quite extensively. Suffice to say, pollution is a direct result of government failure to enforce property rights. The pollution occurs into publicly held land. Government fails to enforce property rights as the landlord.

So we see that the ‘ownership’ of land does not in fact give complete control of its use.

You have not come close to proving that assertion.

In other words in our society the status of land already exists somewhere between the two extremes of ‘private’ and ‘collective’ control, so to move it a little toward the ‘collective’ pole should not be too radical a step.

What exists is that private ownership of land is subject to coercive intervention by government. Government also arrogates to itself extensive land ownership, without any basis other than force.

Socially valuable control
The ideal situation would be if the control of different aspects of land and its use were allocated to the person or persons most able and willing to maximise the social or community value of the land, whether this be householder, housebuilder, farmer or mining company.

True.

But how could such a more socially valuable distribution of land control be achieved without a massive programme of compulsory public land purchase, which would be seen as anti-libertarian and also be impossibly expensive?

Very simply. Allow the free market to allocate the land. The owner of ground land performs this very function. He finds, brings into use, and finally allocates land sites to their most value-productive bidders.

Realising Community Input
In addition to a land use tax (currently the Council Tax) raised to cover the revenue needs of local communally provided services, such as water, sewage, refuse disposal, highways, public transport, parks and libraries, a new tax which allows the community to realise its own input into private land values could be introduced. I propose to call this new tax the ‘Community Land Value Tax’.

How magnanimous of you old chap.

Currently, land lying undeveloped or underdeveloped in towns or cities or on their outskirts gains in value as that town or city develops. This increase in value occurs entirely without any effort or expenditure on the part of the landowner but as a result of the paid and unpaid efforts of the people of the local area in building up their community.

Here we have two separate issues: [i] that land lying undeveloped/underdeveloped gains in value if town/city expands [ii] that this increase in value occurs without any effort/expenditure on the part of the landowner.

On issue [i] the land lies undeveloped for a reason, it is sub-marginal land. At that point in time and prior, it had no value that could earn a rent. The reason for this is that the supply of land exceeds the supply of capital and labour that are required to make the land productive, and thus earn a rent.

It still has a capital value in that it has a potential to earn rent, if, circumstances develop in its favour. The entrepreneur who purchased/owns the land, will potentially gain in capital value if the town/city develops, making his sub-marginal land capable of earning a rent. The entrepreneur who exercised the foresight to purchase the sub-marginal land, tied up and put at risk capital. So he does not reap a reward for no effort or expenditure.

Rise in Market Values
Where a landowner has developed his own land, in a way that meets the needs of the community – in the widest possible sense – it is right that he should gain some benefit. A private landowner should not gain however from a rise in the market value of his land that results from community growth or activity, since on a personal level he can only have played a small part in this rise in value. This change in ‘community value’ would govern the level of the tax levied.

Simply repeating the previous argument. What is this ‘community value’? The community consists of individuals, who all go about their individual businesses, which if the majority are successful, leads to the growth of the physical location of the town as increasing factors of production [land, labour and capital] are employed in that location. Our entrepreneur allocates his previously sub-marginal land to the highest bidder for two reasons [i] this provides him the best return and [ii] this represents allocation to the most productive use. This benefits the ‘community’ to their maximum utility. This allocation is part of the services rendered by the landowner and are valuable.

Undeveloped land and Unmet Needs
Where land is assessed as having the potential to meet a community need but remains undeveloped,

Who exactly is doing this assessment, and how are they going to assess? How do they measure the value or utility of this ‘potential community need’?

perhaps because the landowner is waiting for a possible further rise in land prices,

If he is, the higher price indicates that the most desired use of the land remains to be found. That the previous assessment is in error.

then the tax levied would be the difference between the original purchase price of the land and the market price of the land given the planning permission and the recognised unmet need.

So simply a capital gains tax.

So where land is sold to a housing developer, for example, the rise in value above the original purchase price resulting from the development of the surrounding community, rather than inflation or any development of the land carried out by the landowner himself, will decide the level of the Community Land Value Tax to be levied. In this way the rise in land value created by the community goes back to the community.

Really? How so? It is simply a capital gains tax that goes to government coffers.

Land that was not identified as having any socially useful potential for development or which was already fulfilling its potential would be zero-rated, and would only be liable to the current land use tax (presently the Council Tax).

Which is another way of saying, even when land is sub-marginal and earns no rent, it still gets taxed.

Development leads to Discounting
Development of the land to fulfil its community need would result in the discounting of the tax to zero,

Who decides this community need? The purpose of price, is to allocate the land to its most desired and urgent need. Essentially all that is being said here is that government will provide a subsidy via tax reduction/elimination, to develop/use land in this proposed ‘community need’.

whether this was done by the landlord himself or the purchaser of the land. Any loss of revenue to the local authority is compensated for by the provision of the community need.

We’ll see how this is to be assessed below.

2 Practice

Surveying the Land
Local democratic authorities would have to start from a base of identifying currently unmet community needs, such as housing, employment, resource extraction, agricultural produce etc. They would survey all land within their jurisdiction to assess its most appropriate use to meet these needs of the people of the area; in social, economic and environmental terms.

How exactly do they arrive at these judgments? What methodology, quantitative and/or qualitative, are they to employ to arrive at these judgments of utility?

They would survey all land within their jurisdiction to assess its most appropriate use to meet these needs of the people of the area; in social, economic and environmental terms. For land which was designated as being able to help meet these needs; by development from scratch; by conversion to some new use – which might just include being open green-belt land – a Community Land Value Tax would be levied.

So essentially we are talking about government coercion. We, the government will decide the most appropriate use for your property and use a tax to coerce that use.

Levying the Tax

Single Identified Area
In a situation where only one area of land was identified as requiring a particular ‘development’ the full tax would be levied on the owner of the land in yearly instalments over a pre-determined period of time (taking account of prevailing inflation and interest rates). The landowner would then have the choice of paying the levy, selling the land – the cost of the levy acting to reduce the selling price, or developing the land himself to fulfil the designated social need.

Now if that is not coercion, what would you call it?

Multiple Identified Areas
If, on the other hand, there were several suitable sites for a particular development there would be two options:

* Option 1- Full levy on one owner
The full land valuation tax liability would be levied on the owner of that area of land assessed as being the most appropriate for the needed development. In the last case the community value tax would be rerated at zero. If there were other pieces of land in the area which were also suitable for the specific development and the development was initiated there, then the tax would be transferred to this land from the original land.

* Option 2 – Spread levy onto all owners of appropriate land
The land valuation tax liability would be divided between all landowners whose land was assessed as being appropriate for the needed development. All these landowners would then have the choices. If this development was commenced on one of these sites, then all the sites would then become zero-rated.

How do you prefer your coercion sir, hot or cold?

Zero-rated land
Development proposed for land which has been zero-rated for the Community Land Value Tax will still be liable to the usual planning regulations and procedures, as well as environmental protection legislation.

Simply sub-marginal land, not yet earning a rent, but owned by an individual, does not escape the tax net.

Fall in value of private land
What if community development lowers the value of privately-owned land? Generally speaking since this ‘public gain at private expense’ is far less of a problem than ‘private gain at public expense’,

A value judgment. What if individuals judgments on the matter are the reverse of your own statist position? Who exactly is this ‘public’ anyway? We know who the individuals are easily enough.

and is already addressed by pollution regulations and planning procedures. I don’t believe the added complexity of negative Community Land Value Tax is appropriate.

Ta.

Landowners are not generally poor and in any case they will still be able to realise a price from the sale of the land.

Bit of a generalisation. Given this some real thought I see. Obviously landowners are not part of this rather ill-defined ‘public’ and ‘community’.

Land not producing direct income after development

Development still encouraged
Where a new land use will not produce direct income, development or sale for development will still be encouraged because the landowner would be free to contract with the local authority for appropriate remuneration to maintain the area as required for its new use.

So after coercing the landowner to spend capital in developing this land for the assessed public need, our landowner finds that the public are not interested enough to pay any rent for this development.

Rather, the only way he can gain rent is through expropriation, viz. contract with government to pay him a rent that comes from taxation. What a sick joke that is.

And if the landowner wishes to carry out some commercial activity on this land he would not be barred from this as long as this did not conflict with its primary community use, and met the usual planning and other regulations.

Pathetic.

Method of Remuneration
Where land subject to the tax was converted to public access parkland, for example, the landowner could reasonably expect to receive payment to compensate him for the extra maintenance required to the land in view of its increased use. Whether this payment was contributed by individuals as a charge to use the facility or paid by the local authority would be for the community to decide.

Simply providing an example of the previous argument.

3 Discussion

Arguments in Favour
1. The community realises its own input into private land values

2. Private landowners will be encouraged to either develop their land in line with community needs or sell it to those who will. If they do not then at least the community will realise its input into the land in cash.

3. As a result of the imposition of the Community Land Value Tax the balance of costs will be altered. The market price of land allocated for community development will be lowered to those willing to carry out the required development. This has the result of making developments profitable when they might not otherwise have been so, or lowers the level of prices, rents or charges required to generate the income required to make a development viable. It will be important, however, to have some mechanism which would prevent the cost reduction simply being transferred to greater profit for the developer.

4. As a result of the development activity stimulated by the lowered land cost new jobs would be createdas a consequence.

5. Although local authorities would have a better chance of buying land at the lower prices as a result of the tax, the private sector is likely to be the main beneficiary, so maintaining diversity and competition in the provision of socially beneficial development.

Arguments against
1. The tax is unfair to landowners!
Landowners – not as a group among the underprivileged – will still be able to realise the benefits of their own input, are not forced to sell their land or to develop it if they have the desire and the means not to. They like the rest of the community can share in the community benefit, either of the extra revenue raised or from the new use of the land. The tax favours landowners who use their land for community benefit against absentee landlords who leave socially useful land undeveloped.

2. The level of tax raised will be difficult for local authorities to predict.
Although development of land on which the tax is levied will result in discounting and therefore the loss of revenue, the community’s costs will be lowered as a result of the development. For example, the provision of new low-cost housing by a developer will reduce local authority spending on social housing and homeless provision; new parkland or leisure facilities would reduce spending required on recreation; provision of new employment or educational facilities would reduce levels of social service provision etc. There will also be savings on items such as transport and welfare benefits, accruing to the wider ‘community’.

I can’t think of any more!

In summary the idea is nonsense, unless you happen to be in government actively looking for a way to impose more taxes to raise revenue. Here are some of my objections.

[i] Removes capital from the private sector and redistributes it to the public.
[ii] Distorts the efficient allocation of land, lowering the utility of that land.

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