Shall we agree to disagree, the issue with Social Security is simple. Right now once your income reaches $176,000, you no longer pay Social Security tax. It has been at that level for 30+ years. Increase the cap from $176,000 to $400, 000 and the Social Security insolvency goes away.
The US Government would figure out the least efficient way to calculate and collect a new tax, would create a whole new department to monitor and implement it. Then Congress would immediately want to divert the funds to pay for some pet project.
You are paying taxes on that $176k. This is the same tax bracket logic that conservatives use to claim (falsely) that as income goes up taxes make it so that total post tax income goes down. Other than that, raising the income that is taxed by Social Security solves one problem and creates another in that if you don't increase benefit payouts to higher income earners then you are taking a universal program and making it a means tested one. That undermines the political popularity of the program.
Treating SS income like any other income does not make it a means tested program. And the bad thing, if it’s bad, about “means tested” benefits is the administrative cost of policing the boundary, not the fact that means testing itself makes a program unpopular.
No. The implication from the above poster is you tax higher income brackets for Social Security to make it solvent, then you need to limit benefits to higher incomed persons (a benefit cap would do this.) This turns the universal program into a something more like a means tested program that is redistributive from higher incomes to lower incomes.
Is that what we want? Granted no everyone wants the same thing but flexibility on the employment side and flexibility on the timing of benefits lets people better fulfill their preferences.
There is flexibility in having the option to retire and obtain a little income boost from social security. At least in the US, one can get more social security from retiring later, up to age 72, and retirement is not mandatory.
I know. I think we could go farther in that direction. The greater amount of movement needs to be on the “redeisgn” of expectations about works and education and lifecycle income trajectories.
Yeah I think making the retirement age more flexible (so you can continue to delay beginning your Social Security checks until, say, 80), and in exchange receive a larger check (based on the actuarial tables, to equalize the expected payout regardless of when you start) is preferable here. In theory we can reduce the physical demands of labor with robots, but _will_ we? Right now there are a ton of people for whom continuing to work into their seventies is extremely problematic, and to compound that, the bottom half of the income distribution _doesn't live as long_ as the upper half, for complicated reasons that one could delve into. But regardless of why it's true, saying that grocery shelf stockers should keep working until they literally can't (which probably also will even-further-shorten their lives) so that we can make sure that we don't have to cut payments to retired doctors and lawyers in their 90s, just seems kind of unfair.
Concerns about making SS less progressive ought, I think, be redirected to making income taxes more progressive. Personally, beyond increasing progressivity (ideally of a progressive personal consumption tax not the personals and corporate income tax) enough to make the defect no greater than public investment, I’m pretty happy with the degree of progressivity. But that is where I think that issue belongs.
In an ideal world a VAT is superior to an income tax in many ways. In reality it is worse for a country like the USA.
The two biggest problems for taxes are the issue of compliance burden and the distortionary effects of avoidance. Taxing individual income is much better in both regards.
In theory you can make VAT compliance simple but only at the cost of making it a general drag on economic transactions? In theory a company shouldn't pay more tax because they purchased their lathe or tools or whatever from someone else instead of in house but once you want to do that your VAT tax needs to have all sorts of exceptions depending on the final user and how they intend to use the item. Once that happens you can play games to move the tax to low tax regions. This makes it both expensive to administer and distortionary.
Individuals have well-defined countries they live in and have practical limits on what is worthwhile to do to avoid tax making these issues much more tractable.
Also high income people tend not to be particularly motivated by a desire for increased net consumption. Yes, they want to buy things that are fancy and elite but it's likely they would be just as happy if everything had always cost 50% more because the money functions more as a measure of success. So you can essentially get some money with very little downsides via progressive taxation of income.
I think you are discussing VAT instead of personal and corporate income tax. What I said here is VAT instead of the wage tax and capped wage tax that finance the Medicare and SS trust funds.
And I do not agree that a VAT, even in a perfect world, IS preferable to a progressive personal income tax although a progressive personal consumption tax to replace personal and corporate income taxation is even better.
You are right I made that mistake. But it seems like quite alot of overhead to implement a VAT tax just to do the medicare and SS trust funds. I agree that the issue with progressive taxation isn't relevant in my reply but I think my concern about there being greater potential for tax avoidance (and thus distortion) by corporations than individuals still applies.
Also, those are federal only taxes and the constitution just doesn't allow the federal government to implement a VAT tax. The only taxes it authorizes the federal government to collect must be apportioned (e.g. divided up by state proportional to only the number of citizens) hence the need for the amendment to authorize the income tax.
Maybe I underestimate the difficulty of a VAT, but the fact that so many other counties use it suggests it is not THAT hard. And even “just” Medicare and Social Security would be a pretty bid deal. In fact I’d like to see it used to fund other situational transfers like ACA, unemployment and Medicaid. I’ll leave the progressive personal consumption tax to redistribute consumption downward over the entire life cycle.
The fact that other countries use it suggests that it's not that much harder than an alternative regime. In this story we keep our crazy complex income tax system and add a complex VAT system. I suspect the income taxes in the EU end up being simpler because they only supplement the vat system.
And VAT does have advantages for the EU. In the US situation it's relatively hard for individuals to avoid income tax while in the EU the Schengen zone makes that relatively easier and many of the bookkeeping costs are already there to comply with the complex regulations their common market requires.
But I'd be open to hearing the details. I could certainly imagine reforms that simplify the income tax enough to make it a net positive. But it is all kinda besides the point since the us federal government just can't really do this in a constitutional manner.
What is hard about income taxes is the need to jury-rig it to minimize double taxation of dividends and saved/non-realized income. Eliminate taxation of business income and poof one difficulty gone. Eliminate taxation of income saved or not received or not realized and poof another difficulty gone. But it leaves a personal consumption tax base that can be taxed progressively.
Regarding the idea to not tax income saved or not realized that just turns the income tax into something like a consumption tax for all sophisticated actors. Basically, you only get taxed on your money when you take it out to spend it. And what do you do about purchases of fine art, does that count as an investment because you might later sell the painting hanging in your home? What about purchasing a house or a boat? Defining what is an investment and what isn't is hard -- for all intents and purposes, Elon is realizing his income not saving it when he buys twitter -- and I don't necessarily like how this helps the wealthy accumulate more influence (you get influence by having money you control how it gets invested).
But some unfairness is unavoidable so I'm not per se against this proposal but I think it simplifies things less than you think. Also, it's politically difficult since you need to really take it seriously and not readjust the basis for inheritance.
---
The practical problem with not taxing business income has always been (especially in the US with it's many small businesses) the difficulty of enforcing the rules against individual use of corporate assets. If you have a 0 tax rate for corporations everyone with a small business just drives around in a car owned by the business and businesses start giving more and more perks to employees like free lunch in the office (with the resulting loss of utility because people don't get to use the money to maximize their own utility).
Having said that, I overall think that the benefits of eliminating corporate taxes more than cover the extra funding that would be needed to enforce the tax laws in that situation but most proposals to eliminate corporate tax don't incorporate such an increase.
One somewhat interesting idea for turning the progressive income tax into a progressive consumption tax is to channel all wages through a national savings and investment system. So:
(1) Create postal banking. Everyone automatically has an account.
(2) Create a "national 401k plan", which buys target-date tranches of a Sovereign Wealth Fund. (As a side benefit here, we can phase out the existing complex of private retirement accounts by ending deposits to them and allowing rollovers. That whole system is mostly an opportunity for custodians to charge outrageous fees, with the wheels often greased by stuff like financial firms holding lavish conferences for the HR professionals who get to pick the custodian for their business' retirement plan. You'd need to make sure the Treasury department is exercising serious oversight, and management processes are transparent so the whole SWF doesn't end up as a focus for corruption, but it likely would be better than the existing system.)
(3) All W-2 wages and other distributions of personal income to individuals will now be required to be direct deposited to your postal banking account. By default some percentage will be diverted into the national investment plan (defaulting into a target-date tranche matching the year you'll turn 70). This is _separate_ from whatever taxes you'll be paying for FICA programs. Perhaps we have some exception for certain types of cash earnings; if you decline to deposit them before the end of the year, they will be counted as having been paid and then withdrawn.
(4) Instead of charging the progressive income tax on your _income_, we tax the amount that has been earned _and then withdrawn_ from the postal banking system. Your FICA liability will also be based on this amount.
This is not quite the same as a consumption tax, since it means we'll also tax anything you decide to keep as savings and investment outside the nationally sponsored system. But whatever, people who can afford to maintain significant amounts of liquid investments with Morgan Stanley or other private custodians, can also afford to pay some more taxes.
There are a variety of further elaborations of this idea that make me like it.
(6) It's also an obvious delivery vehicle for a Universal Basic Income.
(7) Once you have UBI via a national bank, you can give the a technocratic agency like the Fed some flexibility to bump the UBI up or down, or even make those adjustments automatically based on tracking of metrics like unemployment and inflation, within some band around the long-term weekly deposit amount determined by inflation adjustment. This would drastically improve fiscal policy stabilization, compared to requiring Congress to get its act together to move fiscal policy in the face of recession or overheating.
I have not thought much about mechanisms for distinguishing consumed from non-consumed income. Yours seem complicated but anything will be complicated.
I suppose the classic way to tax consumption is just to use sales taxes / VAT (broken between the corporate tax portion to capture business-to-business value-add, and a sales-tax-like charge on final transactions with consumers).
That has its own set of complications, and by default tends to be pretty regressive.
I think you just apply apply it to final goods the same as intermediates minus the subtracting out purchased inputs. The complication is exempting final sales for investment of goods and services that could be inputs to either investment or not. Seems the obligation as on the purchaser on some cases just like in sales tax systems there are exempt purchasers. A certain amount of complication is inevitable in any attempt to tax consumption.
Shall we agree to disagree, the issue with Social Security is simple. Right now once your income reaches $176,000, you no longer pay Social Security tax. It has been at that level for 30+ years. Increase the cap from $176,000 to $400, 000 and the Social Security insolvency goes away.
Compared to doing nothing, I agree. But for all the reasons I gave I still think a VAT is better (and Medicare is already uncapped).
The US Government would figure out the least efficient way to calculate and collect a new tax, would create a whole new department to monitor and implement it. Then Congress would immediately want to divert the funds to pay for some pet project.
So all reform is hopeless and we should just shut Substack down. :)
To be semi-serious, that would not happen less becasue Republicans would be watching this like (deficit) hawks.
You are paying taxes on that $176k. This is the same tax bracket logic that conservatives use to claim (falsely) that as income goes up taxes make it so that total post tax income goes down. Other than that, raising the income that is taxed by Social Security solves one problem and creates another in that if you don't increase benefit payouts to higher income earners then you are taking a universal program and making it a means tested one. That undermines the political popularity of the program.
Treating SS income like any other income does not make it a means tested program. And the bad thing, if it’s bad, about “means tested” benefits is the administrative cost of policing the boundary, not the fact that means testing itself makes a program unpopular.
No. The implication from the above poster is you tax higher income brackets for Social Security to make it solvent, then you need to limit benefits to higher incomed persons (a benefit cap would do this.) This turns the universal program into a something more like a means tested program that is redistributive from higher incomes to lower incomes.
Why shouldn't workers get a break in the last portion of their life, after being a wage slave for over 4 decades?
Is that what we want? Granted no everyone wants the same thing but flexibility on the employment side and flexibility on the timing of benefits lets people better fulfill their preferences.
There is flexibility in having the option to retire and obtain a little income boost from social security. At least in the US, one can get more social security from retiring later, up to age 72, and retirement is not mandatory.
I know. I think we could go farther in that direction. The greater amount of movement needs to be on the “redeisgn” of expectations about works and education and lifecycle income trajectories.
Yeah I think making the retirement age more flexible (so you can continue to delay beginning your Social Security checks until, say, 80), and in exchange receive a larger check (based on the actuarial tables, to equalize the expected payout regardless of when you start) is preferable here. In theory we can reduce the physical demands of labor with robots, but _will_ we? Right now there are a ton of people for whom continuing to work into their seventies is extremely problematic, and to compound that, the bottom half of the income distribution _doesn't live as long_ as the upper half, for complicated reasons that one could delve into. But regardless of why it's true, saying that grocery shelf stockers should keep working until they literally can't (which probably also will even-further-shorten their lives) so that we can make sure that we don't have to cut payments to retired doctors and lawyers in their 90s, just seems kind of unfair.
My reasons are not related to saving money.
Concerns about making SS less progressive ought, I think, be redirected to making income taxes more progressive. Personally, beyond increasing progressivity (ideally of a progressive personal consumption tax not the personals and corporate income tax) enough to make the defect no greater than public investment, I’m pretty happy with the degree of progressivity. But that is where I think that issue belongs.
In an ideal world a VAT is superior to an income tax in many ways. In reality it is worse for a country like the USA.
The two biggest problems for taxes are the issue of compliance burden and the distortionary effects of avoidance. Taxing individual income is much better in both regards.
In theory you can make VAT compliance simple but only at the cost of making it a general drag on economic transactions? In theory a company shouldn't pay more tax because they purchased their lathe or tools or whatever from someone else instead of in house but once you want to do that your VAT tax needs to have all sorts of exceptions depending on the final user and how they intend to use the item. Once that happens you can play games to move the tax to low tax regions. This makes it both expensive to administer and distortionary.
Individuals have well-defined countries they live in and have practical limits on what is worthwhile to do to avoid tax making these issues much more tractable.
Also high income people tend not to be particularly motivated by a desire for increased net consumption. Yes, they want to buy things that are fancy and elite but it's likely they would be just as happy if everything had always cost 50% more because the money functions more as a measure of success. So you can essentially get some money with very little downsides via progressive taxation of income.
I think you are discussing VAT instead of personal and corporate income tax. What I said here is VAT instead of the wage tax and capped wage tax that finance the Medicare and SS trust funds.
And I do not agree that a VAT, even in a perfect world, IS preferable to a progressive personal income tax although a progressive personal consumption tax to replace personal and corporate income taxation is even better.
You are right I made that mistake. But it seems like quite alot of overhead to implement a VAT tax just to do the medicare and SS trust funds. I agree that the issue with progressive taxation isn't relevant in my reply but I think my concern about there being greater potential for tax avoidance (and thus distortion) by corporations than individuals still applies.
Also, those are federal only taxes and the constitution just doesn't allow the federal government to implement a VAT tax. The only taxes it authorizes the federal government to collect must be apportioned (e.g. divided up by state proportional to only the number of citizens) hence the need for the amendment to authorize the income tax.
Maybe I underestimate the difficulty of a VAT, but the fact that so many other counties use it suggests it is not THAT hard. And even “just” Medicare and Social Security would be a pretty bid deal. In fact I’d like to see it used to fund other situational transfers like ACA, unemployment and Medicaid. I’ll leave the progressive personal consumption tax to redistribute consumption downward over the entire life cycle.
The fact that other countries use it suggests that it's not that much harder than an alternative regime. In this story we keep our crazy complex income tax system and add a complex VAT system. I suspect the income taxes in the EU end up being simpler because they only supplement the vat system.
And VAT does have advantages for the EU. In the US situation it's relatively hard for individuals to avoid income tax while in the EU the Schengen zone makes that relatively easier and many of the bookkeeping costs are already there to comply with the complex regulations their common market requires.
But I'd be open to hearing the details. I could certainly imagine reforms that simplify the income tax enough to make it a net positive. But it is all kinda besides the point since the us federal government just can't really do this in a constitutional manner.
What is hard about income taxes is the need to jury-rig it to minimize double taxation of dividends and saved/non-realized income. Eliminate taxation of business income and poof one difficulty gone. Eliminate taxation of income saved or not received or not realized and poof another difficulty gone. But it leaves a personal consumption tax base that can be taxed progressively.
Regarding the idea to not tax income saved or not realized that just turns the income tax into something like a consumption tax for all sophisticated actors. Basically, you only get taxed on your money when you take it out to spend it. And what do you do about purchases of fine art, does that count as an investment because you might later sell the painting hanging in your home? What about purchasing a house or a boat? Defining what is an investment and what isn't is hard -- for all intents and purposes, Elon is realizing his income not saving it when he buys twitter -- and I don't necessarily like how this helps the wealthy accumulate more influence (you get influence by having money you control how it gets invested).
But some unfairness is unavoidable so I'm not per se against this proposal but I think it simplifies things less than you think. Also, it's politically difficult since you need to really take it seriously and not readjust the basis for inheritance.
---
The practical problem with not taxing business income has always been (especially in the US with it's many small businesses) the difficulty of enforcing the rules against individual use of corporate assets. If you have a 0 tax rate for corporations everyone with a small business just drives around in a car owned by the business and businesses start giving more and more perks to employees like free lunch in the office (with the resulting loss of utility because people don't get to use the money to maximize their own utility).
Having said that, I overall think that the benefits of eliminating corporate taxes more than cover the extra funding that would be needed to enforce the tax laws in that situation but most proposals to eliminate corporate tax don't incorporate such an increase.
One somewhat interesting idea for turning the progressive income tax into a progressive consumption tax is to channel all wages through a national savings and investment system. So:
(1) Create postal banking. Everyone automatically has an account.
(2) Create a "national 401k plan", which buys target-date tranches of a Sovereign Wealth Fund. (As a side benefit here, we can phase out the existing complex of private retirement accounts by ending deposits to them and allowing rollovers. That whole system is mostly an opportunity for custodians to charge outrageous fees, with the wheels often greased by stuff like financial firms holding lavish conferences for the HR professionals who get to pick the custodian for their business' retirement plan. You'd need to make sure the Treasury department is exercising serious oversight, and management processes are transparent so the whole SWF doesn't end up as a focus for corruption, but it likely would be better than the existing system.)
(3) All W-2 wages and other distributions of personal income to individuals will now be required to be direct deposited to your postal banking account. By default some percentage will be diverted into the national investment plan (defaulting into a target-date tranche matching the year you'll turn 70). This is _separate_ from whatever taxes you'll be paying for FICA programs. Perhaps we have some exception for certain types of cash earnings; if you decline to deposit them before the end of the year, they will be counted as having been paid and then withdrawn.
(4) Instead of charging the progressive income tax on your _income_, we tax the amount that has been earned _and then withdrawn_ from the postal banking system. Your FICA liability will also be based on this amount.
This is not quite the same as a consumption tax, since it means we'll also tax anything you decide to keep as savings and investment outside the nationally sponsored system. But whatever, people who can afford to maintain significant amounts of liquid investments with Morgan Stanley or other private custodians, can also afford to pay some more taxes.
There are a variety of further elaborations of this idea that make me like it.
(5) It's a great vehicle for Cory Booker's Baby Bonds system ( https://www.vox.com/policy-and-politics/2018/10/22/17999558/cory-booker-baby-bonds ) which can be thought of as "universal basic wealth".
(6) It's also an obvious delivery vehicle for a Universal Basic Income.
(7) Once you have UBI via a national bank, you can give the a technocratic agency like the Fed some flexibility to bump the UBI up or down, or even make those adjustments automatically based on tracking of metrics like unemployment and inflation, within some band around the long-term weekly deposit amount determined by inflation adjustment. This would drastically improve fiscal policy stabilization, compared to requiring Congress to get its act together to move fiscal policy in the face of recession or overheating.
I have not thought much about mechanisms for distinguishing consumed from non-consumed income. Yours seem complicated but anything will be complicated.
I suppose the classic way to tax consumption is just to use sales taxes / VAT (broken between the corporate tax portion to capture business-to-business value-add, and a sales-tax-like charge on final transactions with consumers).
That has its own set of complications, and by default tends to be pretty regressive.
I think you just apply apply it to final goods the same as intermediates minus the subtracting out purchased inputs. The complication is exempting final sales for investment of goods and services that could be inputs to either investment or not. Seems the obligation as on the purchaser on some cases just like in sales tax systems there are exempt purchasers. A certain amount of complication is inevitable in any attempt to tax consumption.
2020? Looks like we're traveling back to the past