France's Moment To Think Clearly

Readers of this blog may recall this blog post last year in which I discussed the ridiculous policy idea by the new government in France. In a move whose motive is clear but whose logic is just absurd, the government of France initiated to tax citizens for overtime tax. At that same time, there were discussions on further tax policy measures intended to raise the marginal tax rates on individuals whose income passed a certain threshold. Unbelievable as it is, the idea by President Hollande is to raise the marginal tax rates to 75%.

Gerard Depardieu, a very famous and wealthy citizen of France announced that he would take residence in Belgium but denied here that this was driven by this increment in the marginal tax rates. During the last weekend, the same actor received a Russian passport from none other than Vladimir Putin of Russia in an obvious rebuff to the French government.

To my mind, the government of France ought to be take to some reflection if a citizen who has paid substantial taxes over decades is suddenly showing preference for Citizenship in Russia. And I am sure that the differences between France and Russia do not rest with marginal tax rates and so perhaps Depardieu is right that calculations on tax liability is not the reason at all for this change. In spite of that, France's government should consider why a leading citizen is so happy to become Putin's buddy. Part of the answer is that both political and economic freedoms matter and citizenship can be cheapened with poor economic thinking manifest in ridiculously high and oppressive tax rates.  

Update: I have to state that the government of France was stopped from raising the marginal tax rate to 75% by a court decision. For that reason, the rise has not occurred but it is clear that the administration is determined to raise it and will maneuver around the court's decision. 

Warren Buffet Reasons Income Tax Policy

To my mind, one of the most difficult matters in economic policy is the decision about setting tax rates for income by individuals and by corporations. It is also one area in which ideology can get intelligent people twisted in their"you know what". As  a libertarian, I start with the sensible view that taxes should be moderate not only to avoid the distortions that it creates in addition to giving people an incentive to work and keep a higher proportion of what is legally earned. Such a view seems sensible until people have to argue about whether a 20% tax on income is sufficient or not.

Warren Buffet pitches into the discussion that animated the US Presidential elections with firmly argued points. His most potent statement in this article is that those who are ideologically committed to lower taxes overstate their case by making the claim that investors are preoccupied with tax rates as a determinant of capital deployment. In the article, he makes a very solid case that both investment rates, growth and income levels in the United States have been substantially higher than they are today and therefore it is improper to state that any upward tax adjustments for wealthy people would harm economic growth. As he argues in , the lower tax burden has contributed to a redistribution of income from the middle class towards the wealthier Americans and thereby exacerbated inequality, while denying the public sector of revenue to meet existing obligations.

Towards the end of the article, he goes out to state that given the federal government's finances today and in the medium term, a minimum tax rate for high income earners should be set. Warren Buffet is correct because he argues that tax rates must respect context and are not n end unto itself. Clearly, every hard working entrepreneur wishes to keep most of his income but the decision for tax rates is about a political discussion. Which brings me back to the fact that I prefer lower tax rates but there is no rule that states that raising taxes is by itself good economic policy.    

Let Plumbers Take Pay in Cash

Faucet 2 clipart
from Clker.com

I consider it sensible economic policy for every government to levy taxes on goods, services or income only where it can collect a majority of those taxes. Therefore, while I am not of the view that payment of taxes is equivalent to slavery, I think that a government ought not to announce a tax rate and then further burden the citizen with the duty to ensure that that tax is collected as conveniently and promptly as is possible. With those views in mind, I am not as sympathetic to the near demand by the Secretary of the Exchequer of the UK government in his preposterous claim here that citizens who pay plumbers in cash are engaged in immoral acts because it makes it easier for the latter to evade or avoid tax payments. 

More recently, governments have been correctly concerned with the operations of tax havens which may support practices that are illegal in terms of tax evasion. That aside, most tax evasion occurs simply because of unduly complex characterization of what is taxable and what is exempt in addition to trying to capture transactions for which the existing tax collection model is a poor fit. despite my real sympathy with the need to collect taxes to cover deficits and close up the debt position, I am reluctant to accept this ranting by public sector officials that all citizens should bear the burden of ensuring that the revenue service catch every penny.

To my mind, citizens should not be forced to write cheques and avoid the convenience of legitimate cash transactions in order to ensure traceability for the revenue services. Perhaps its just time to ask that governments should discuss plainly whether levying a tax that is this difficult to collect is good use of the legislative authority. The remedy comes back to creating moderate tax rates and simplifying the tax system and ensuring that government is run from the resulting revenues. Its not too clever to levy taxes and ask citizens to help with the thinking about ensuring absolute compliance. Just simplify the tax code.

  

Warren Buffet on Shared Tax Sacrifice

Despite my being a libertarian, I find it completely annoying that people ascribe their reluctance to pay taxes on non-existent reasons. Writing in the NYT, Warren Buffet bells the cat by stating and refuting the unreasonable stances maintained by politicians who are opposed to taxation by using wealthy investors as cover. Many people assume that the claim that taxation of incomes reduces incentives for investments is established in theory and empirically without question.warren Buffet states that the idea that all taxation is harmful to investment is ideologically driven but is not supported by his own experience or knowledge. hHe makes a valid case that is hard to refute but will not necessarily shut up the ideologues of zero taxation.  

Because the article speaks for itself, I see no need to paraphrase it as I am not close to paying US$ 6 million in annual income taxes and neither do I pay income taxes to the US government. However, I will state that it is understandable for any person to desire to keep as much of his earned income as is possible but that there is no reason to think that a no tax movement is automatically consistent with being necessarily libertarian. In other words, it is not honest to overstate the need to maintain low tax regime or the value of absolving super-rich from paying taxes.     

Running Circles Around Greek Tax Collectors

Due to my libertarian inclination, I prefer that governments should set modest tax targets with comparatively low levels of income taxation. Indeed, my favourite tax quote is Sir William Petty's aphorism that was quoted here. As the statement suggests, there are people who are capable of paying taxes but opt to evade taxes and thereby record higher savings or consumption at the expense of others. In spite of my belief that heavy taxation of a few people is bad policy, I still retain the view that tax cheating is despicable behaviour.

And yet governments are not always blameless when a portion of capable citizens easily evade taxes. My argument is that complicated forms of tax reporting and collection give the excuse and opportunity for many capable earners from remitting their taxes promptly. And again, governments tend to look aside when the times are fine and only try to close tax gaps when the economy is doing poorly. Greece instituted some measures to identify and punish tax cheats in order to close its deficit but has had only modest success.

Suzanne Daley reports in the NYT that the level of tax cheating in Greece is so high and done with such shamelesness that government has had to respond. What this story states is that tax cheats and professionals who underreport income face incentives and therefore calculate carefully the probability of their capture. To my mind, the persistence in cheating is not only a dare to government but also a reflection of the citizen's feedback that they consider government to be incompetent. Thinking that the use of satellite photos to identify residences with swimming pools would catch enough of the tax evaders, the failure to execute promptly has led to purchase of pool covers which makes identification more difficult.

This would form background reading for a good lesson on applied economics because it illustrates that tax evaders, like all people, respond to initiatives to catch them. Revenue collectors must be equally nimble and smart and so far, the Greek service is neither of these. Perhaps governments should levy only taxes that they can collect.

Casting Spells on Taxes

As a person with libertarian orientation, I maintain the view that every person is entitled to keep the vast majority of the money that he generates for his own use. Taking forward this argument, I am therefore in favor of reasonably sized government maintained on low debt and equally low taxation. Having come thus far, I still understand that political choices on fiscal policy are often difficult even if their results are sometimes completely predictable. 

I also understand that sometimes government faces the policy choice that requires raising taxation on an activity of one kind or another. All that notwithstanding, I am completely intrigued by this article in the Huffington Post reporting that witches in Romania are so livid due to the government's quest to tax their income that they have responded by casting (evil) spells against that government. One would say that absent a tax revolt, any response from the witches is excusable except that government officials seem to be adopting some defensive action to ensure that spells are warded off. 

To my mind, I suspect that given the low levels of income that a majority of the witches earn, the government of Romania will probably be unable to collect those taxes in a cost effective manner. However from a scientific perspective, it is a nice thing because it shows that some bureaucrats have looked long and hard at fiscal affairs and decided that witches should share in carrying the fiscal burden. Spells and curses be damned. On the other hand, the witches are disappointing because they should offer the government the opportunity to pull taxes from a  magic hat in exchange for being allowed a tax cut for all time. 

Musing on Laffer Curve and Government Size

I attended a brain storm session with some officers of the public sector together with some scholars and a few professionals of various background sometime during the week. While it was not specifically mentioned, many suggestions seemed to take the Laffer Curve as embodying truth. As a libertarian, I was led to think more clearly about the contradictions that inhere from supporting tax cuts as a mechanism of raising more revenue.

My personal view is that at all times, it is more preferable to consider the lower marginal tax rate in designing policy. This means that while I may be reluctant, policy choices may sometimes require raising the tax rates as a matter of fact. What I found disturbing is that a fiscal conservative should be careful in arguing that more taxes follow from lowering tax rates because of the assumed rise in total tax collection. To my mind, this is inconsistent because if that were true, then the rise in revenues would mean that lower taxes lead to bigger government. And that's why I maintain that lower taxes as supported by libertarian thinking is more defensible because it merely argue for letting individuals or corporations to keep a greater share of their incomes. Anything beyond that is to overstate the need for lower taxation.

Quoting William Petty

"That which angers men most is to be taxed above their neighbors." Sir William Petty

Its the season for tax returns in the country where I live and I just encountered William Petty's quote. I feel that he speaks for me today.

Why Tax Policy is Politics

One of the things that I find useful about the experience of the last recession and accompanying economic crisis is the need to re-examine and distinguish between economics and business policy. The reason for stating this is that many people with a successful business background more often than not assume knowledge and competence in matters of economic policy. In addition, the economics crisis has led me to the more critical distinction between what advise a dispassionate economist may give on the one hand and other issues of policy that involve political choices.  This too is an area in which even economists mistake their political opinion for professional views.

An example of such an area of policy involves taxation generally and the application of appropriate tax rates to capital gains. Economists argue rightly that taxation of capital gains amounts to second-round taxation because these gains arise from income that was already subjected to taxation. Often the happy compromise is to subject capital gains to a lower level of taxation in comparison to other income. Sensible as ever, John Kay illustrates why capital gains is difficult to precisely define and therefore to exempt or to subject to taxation in  a rational and consistent way. His main argument is that maintenance of tax compliance requires that some capital gains taxes be levied. In emphatic terms, he states that the issue is "quite properly the subject for political compromise". This is one point that should be borne in mind as taxation policy is discussed. 

Should the US Prepare for VAT?

Any curious person visiting the US notes very quickly that it is one country that has rejected or avoided the imposition of the Value Added Tax (VAT). While not a very perfect replacement, the US citizens pay sales taxes which vary by state and do not end up in the coffers of the federal government. The reasons for this difference between the US and a majority of OECD countries have been debated but the main contention now is whether the US will consider the introduction of a tax designed in the format of the VAT.

And this brings me to this fine piece by Gregory Mankiw addressing the question but through the lenses of a dispassionate professional economist. Mankiw demonstrates easily that viewed from first principles, the taxes pretty much have the the same with the added advantage of making tax dodging more difficult. Not that this clear explanation would resolve the arguments by ideologues. Democratic-leaning professionals are concerned about the fact that a VAT is not sufficiently progressive as a tax even if they prefer to increase government revenues for entitlement programmes. On the other hand, Republican-leaning individuals would be  opposed to VAT for the reason that it would lead to an expansion of government even if it is much akin to their favored flat tax.

From the perspective of an economist, the resolution of the question of the burden, progressivity and the size of government are purely political questions. As a result, the introduction of the VAT will depend on which side makes the more convincing political argument with voters. All an economist can do is let them know what the consequences of any choice is.

 

Why Ideologues Should Not Set Income Tax Policy

Setting objectively defensible tax policy is very difficult when non-economic considerations are part of the game. The reason for this is that on many occasions, taxation policy tries to achieve diametrically opposed outcomes. For instance, many people think of income taxation as not only the quest to maximize public revenues, but also for equalization of incomes. On this issue of taxation, Barack Obama did make the campaign promise to raise the income taxes of the top 5% of income earners in the US. Predictably, the political responses were the same simplistic views of hitting the rich on one side and the counter-arguments about the need to pay for public expenditures. With the economic crisis in the US today, tax policy is right in the front of debates between the major parties. This is disappointing only because the same arguments are being given especially for those opposed to the intent to increase income taxes.

David Leonhardt traces the history of income taxation policies in the Us and more particularly about the need to consider tax brackets and the incidence of the taxes. As he states, the marginal tax rates in the US have reduced substantially in the period since the last century from a high of 90% to less than 40%. But most impressive in the article is the fact that the top tax rates today kick in at a very low income level when adjusted for inflation and that at one time, the tax brackets were sufficiently broad that the marginal rate applied merely to John D. Rockefeller, an individual with a very high income.

One sees that this illustrates the fact that setting income tax policy requires trade offs related to maximization of revenues on the one hand and the ability to number of tax brackets to ensure progressivity. As matters stand, many people who are merely wealthy are subjected to the same tax rates that apply to the wealthiest people in the US. That is very difficult to justify. Consideration of the tax brackets is due as well because income tax policy is not supposed to be easy. Wat makes it confusing is that many ideologues come in with answers before the problem is even stated. The US government today needs to improve revenues and that means that raising the top tax rate is inevitable. Still, it should consider the tax fact that the marginal tax bracket kicks in at a comparatively lower level in real terms.

Take Some Investments Away from Real Property

For many astute observers of world financial markets, it is clear that this is almost certain to be a very difficult and humbling year. For that reason, the housing crisis that has precipitated this series of financial crises has almost been written about to the extent that it is difficult to say anything new about it. What I suspect is less clear to students of economics is why all this started with housing. Especially since the conventional wisdom is that owning a home is one of the safest ways to invest one's money.

Writing in the regular NYT column, David Leonhardt writes about how US citizens came to be overinvested in real property and housing. Understandably, it all goes to the question of incentives generally and those that deal with the relative advantages -provided by public policy to housing and mortgages. Not only is a higher proportion of taxes deductible for real property but the nominal figure is also high. Considering the first principles that would suggest that people would respond to the incentives, it is altogether understandable that investments would not only be moved into property but they would be kept there in the belief that they would never lose value.

Before there were greedy corporations pushing mortages that were unaffordable for some together with a variety of creative financial instruments, the tax code was already tilted towards house ownership. What is unclear is whether the conventional wisdom has been exploded.

Use Chemistry to Determine Alcohol Taxes

The one area in which governments receive little resistance when applying taxes is in respect to alcohol and cigarettes. It is almost taken for granted that there is justification for hiking taxes on these two since they are not considered completely essential. In the UK in particular, one of the debates has been on applying taxes to the category of alcoholic beverages known as "alcopops". This is a category of alcoholic beverages that are sometime brightly colored and altered taste but do have a significant alcoholic content. the conventional wisdom is therefore that this leads to the consumption of a higher quantity than would be otherwise consumed.

In this news item, the Conservative Party of the UK is now proposing to raise taxes substantially on this category of alcoholic beverages because they are argued to cause binge drinking. Indeed, the major argument is that this category of beverages are problem drinks and that increased taxation on them would be used to reduce taxes on the others.

Apart from my curiosity about the tag "problem drinks", both parties seem to be unwilling to correctly define the problem. To my mind, the issue is not the consumption per se, but the quantity that are consumed. the appropriate response would be informed by the realization that "alcopops" may merely represent a concentrated form of alcohol. A better way to consider taxation of alcoholic beverages is to calibrate taxes based on the quantity of alcohol by volume irrespective of the name of the product. In that way, there would be no need for the cross-subsidy but all consumers of alcohol would pay taxes in accordance with the quantity of alcohol that they consume as opposed to brands that they chose. After all, inebriation results from the amount of alcohol ingested and not the name.

Warren Buffet Asks to Pay More Income Tax

A story in the Guardian site today quotes Warren Buffet unequivocally stating that he should pay more tax. Reading the piece and having followed Warren Buffet's claims in recent years, he seems genuinely concerned that he presently pays a far lower income tax rate than his employees do. Of the top ten billionaires in the world, I am certain that he is alone not only in commenting on the matter and further that he is intent on giving to philanthropy while being prepared to pay taxes too. He is also unique in not appointing tax planners with the view to reducing his overall tax burden.

As a normative discussion, it is very difficult to reconcile approaches about how to distribute the tax burden and given that fact, perhaps warren Buffet ought to advocate for a reduction of the income tax rates for all his employees to the 17.7% level. This would certainly be far better for them than to merely have Warren Buffet's income tax rate increased.