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If you tax income, then people will take their compensation in a corporation.

Canada addresses the personal/corporate problem with an integrated tax system: To a first approximation, individuals who receive corporate dividends get a refund of the taxes which the dividend-paying corporations paid on that income. It never works out exactly equal, but as long as I've been running Tarsnap the difference between "pay a bonus" (employment income for me, deductible for the corporation) and "pay a dividend" (dividend income for me, paid by the corporation with after-tax dollars) has been less than 1%.

I really don't understand why other countries don't use the same system.

Australia does this through the use of "franking credits" attached to dividends.

> If you make 8 figures year then it's worth your while to spend alot of money to structure your finances so you pay as little tax as legally required.

I understand what you're saying. If you make $50,000,000 per year, then at some point it's worth spending $500,000 on an accountant who will manage to avoid you paying $10,000,000 in taxes. The math clearly works out, and that's why people do it. I get it.

But man, does it really need to be that way? Is it really so bad to "only" gain $40,000,000 per year instead of $49,500,000? Can you really not get by without that $9.5MM? We've got crumbling infrastructure, cash-strapped schools, students loaded with debt, and the fallout from a housing bubble, but Mark Zuckerberg really needs that new yacht.

Anyway, I can't say I wouldn't do the same in his situation. I understand the motivations. I'm just griping.

* Numbers all fabricated to illustrate my point.

We've got crumbling infrastructure, cash-strapped schools, students loaded with debt, and the fallout from a housing bubble, but Mark Zuckerberg really needs that new yacht.

Doubling or tripling tax revenue from the super wealthy would not provide the funds to solve any of these problems, if indeed they would be solvable with "more money". There just aren't that many super wealthy people.

Is this true, though? I agree there are not that many super wealthy people. But my guess is that these people are so mind-bindingly, astoundingly wealthy, that you could adequately fund most of the government simply by focusing on the top-N (for some value N).

According to Forbes, there are ~500 billionaires in the U.S., with an average wealth of ~$4B. Let's say $2T total.

If you assume they can make 10% annually on that wealth (probably optimistic), that's $200B/year.

It is totally implausible given the history of U.S. tax policy and compliance, but let's say you could capture a 50% effective rate of that.

That's $100B/year: Not even half the increase in U.S. tax revenue between 2013 and 2014 due to economic growth[1]. Did that extra $200B enable Congress and the President to solve significant problems last year?

[1] And whether you believe in the Laffer curve or not, it's hard to imagine that levying a massive tax on billionaires' investment income would have a positive effect on economic growth & thus tax revenue from the non-super-rich.

Thanks for doing the math. We can nit-pick over assumptions but that puts it into better perspective. Perhaps the N in "Top-N" needs to be greater, but then you're no longer "focusing" on a particular income level as I initially argued for.

The federal budget is nearly $4 trillion. The top 400 Americans earn about $134 billion. The top 1% earns about $2 trillion. Even taxing them at 50% would only raise half of what was needed.

I think you make an implicit claim by citing these numbers that taxing those 400 specific Americans more is not the solution to solving problems related to the state not having enough money.

But isn't there an argument to be made that when these ultra-rich are stripped of their billions, they are less likely to spend money trying to do things to bend laws to their benefit?

If Koch brothers / Soros did not have the billions they do, they'd spend a lot less gaming the system, thereby the larger population of non-rich having greater power in the system, in essence ensuring better democracy, do you agree?

I don't think that spending in attempts of gaming the system really amount to much: http://freakonomics.com/2012/01/17/how-much-does-campaign-sp....

I think we have exactly the government one would expect from taking account of the demographics of voters. 2/3 of voters in midterm federal elections are 45+ and the median voter in municipal elections is pushing 60: https://www.minnpost.com/eric-black-ink/2015/07/tracking-tur....

Given the demographics, I have a hard time seeing what exactly would be different if the rich had less power. I mean, are we going to raise taxes to make health care free for younger people, when the median voter is going to be eligible for Medicare in a few years anyway? And is it really rich people lobbying for more surveillance and resisting decriminalization of drugs, or is it my mother?

> And is it really rich people lobbying for more surveillance and resisting decriminalization of drugs, or is it my mother?

While your mother may be voting for such policies, she is likely not lobbying for them (or writing them). The companies and high net worth individuals who have a financial stake in these policies are the ones doing that.

Every piece of legislation that exists benefits a rich person in some way.

If voters oppose, say, drug decriminalization,[1] who cares if rich people who might benefit from the drug war lobby to keep the existing laws?

[1] Which they do by a huge margin, with the sole exception of marijuana: http://www.huffingtonpost.com/2014/04/17/drug-legalization-p....

Thats not really the point as i see it though, its more one of fairness ... why should the richest of the rich get to basically make their own law and play by a different set of rules than the rest of us ?

When you actually start doing the math it turns out that you need to tax the plain old rich as well as they super-duper-wealthy. That's what is problematic about rampant special pleading for expansive definitions of "middle class".

There was recently an op-ed in the New York Times about this very subject.+ I encourage you to read the comments. Every time the issue is raised you get the same predictable whines about how tough life is on two or three hundred thousand dollars a year. A typical complaint is about how expensive Manhattan apartments are, which is like complaining that it is hard to make ends meet after making the monthly Ferrari payment.

+ http://www.nytimes.com/2015/12/28/opinion/campaign-stops/250...

I don't make nearly that much (I wish!) but as a middle-class taxpayer in CT, here are my feelings on the matter.

I am most certainly not opposed to the idea of taxes since society cannot function without the government providing some essential services. That said, I am opposed to paying a dime more than entirely necessary as it stands today because I see so much of my tax contributions being wasted.

* Medicare ineligibility to negotiate rates

* Military projects that are vastly over budget

* Government budgeting practices that promote blowing your entire budget at the end of the year so that it's not cut the next

* Excessive and abusive pension amounts for public employees

* Refusal to appropriately discipline public employees (police) for wrongful conduct

I can keep listing more, however before I am asked or required to send in another penny to be spent, I personally would expect at least some of these issues to be addressed, at least where spending is concerned. Until progress is made in these areas, then I will continue to be staunchly opposed to any tax increases and will do whatever I can to lower my own tax bill. If I feel my money is being wasted, then I may as well be the one wasting it rather than the government.

While I think the amount of government waste is vastly overstated, I do understand what you're saying. But I was specifically addressing people who take so much income that they bother with these complicated tax-avoidance schemes. At that level of wealth, the difference between $40MM and $49.5MM of income is not appreciable. I was just griping that it'd be nice if they didn't try so hard to keep every cent of their massive income, so we could simplify the tax code and possibly improve our public services given the increased revenue.

(To be ultra-clear, I know this is in the realm of fantasy-land and I understand why.)

You do not need consent from the wealthiest to simplify tax code. They have very few votes.

> We've got crumbling infrastructure, cash-strapped schools, students loaded with debt, and the fallout from a housing bubble, but Mark Zuckerberg really needs that new yacht.

It's interesting that you mention education and infrastructure as the big problems, because this is an article about federal taxation, while those are largely state and municipal areas of responsibility.

We spend more on education per capita than every developed country except Switzerland. And while our infrastructure is crumbling, it's because states and cities choose to pay for it through regressive means such as user fees instead of taxes. That's probably because they're in competition with other states and cities to attract residents and businesses.

> But man, does it really need to be that way? Is it really so bad to "only" gain $40,000,000 per year instead of $49,500,000?

They didn't get that wealthy by understanding the meaning of the word "enough".

As an accountant once told me unless you tax wealth then you can't fight this... and good luck getting an annual tax against wealth passed into law.

The direct tax clause of the original constitution, even as modified by the sixteenth amendment, probably forbids such a thing at the federal level. So it'd likely take a constitutional amendment.

That said, I'm not quite as pessimistic as you. Between consumption taxes and estate taxes (which are about the only wealth tax we have) we could get at most money if we had the will to do so. The estate tax is filled with holes because Congress wants it to be, not because of any inherent complexity or definitional difficulties.

There is an ultimate tax avoidance strategy of renouncing citizenship and living and consuming abroad. I would impose a lifetime ban on entry on renouncers, but beyond that I think it is fair game. If you aren't an American we shouldn't be taxing you.

Scott Sumner (commenting on John Cochrane) hinted at something similar recently: http://econlog.econlib.org/archives/2015/12/heres_john_coch....

People may, and often do, renounce citizenship for other reasons than tax.

Like what?

I would say politics.

Also it is my understanding that if an American would like to move to another country, and become a citizen of that country (for any number of reasons), they have to renounce their American citizenship.

People moving to the United States, on the otherhand, may retain their citizenship of certain countries, such as Canada.

These are both untrue.

I'm not aware of a single American individual who gave up their citizenship for politics (and I work in this field).

Secondly, nobody has to give it up if they obtain another citizenship. US government actually makes it hard and expensive to go through this process.

>> These are both untrue.

>> I'm not aware of a single American individual who gave up their citizenship for politics (and I work in this field).

Firstly I'm not sure which 'both' are untrue, as I had 3 points, so your response is a little confusing.

Politics: There where some number of American men who where wanting dodge the American draft before it was abolished in 1973, particular in the 60 and 70s. I suspect some number of draft-dodgers renounced their American citizenship. Similarly, some number of American women did not want their children to be subject to the draft, and didn't agree with American wars, so they too moved away, and renounced their American Citizenship--I know some women for who this is absolutely the case. I also know some people who currently reside outside of the US who would renounce their American citizenship were Trump to be elected president. I would say all of these example falls under the board heading of "politics".

I would agree that it is currently the policy of the US Government not to make individuals renounce their citizenship where they to become a citizen of another country, but I do not know the history. It is that other countries do make new citizen renounce their other citizenship(s); Singapore, for example. https://en.wikipedia.org/wiki/Renunciation_of_citizenship

Similarly, if Singapore citizen was to obtain American Citizenship, s/he would have to renounce their Singaporean Citizenship.

As an accountant once told me unless you tax wealth then you can't fight this... and good luck getting an annual tax against wealth passed into law.

Wealth has many of the same problems. Unless you're going to try to tax someone's global holdings (how?), it's much easier for a hedge fund billionaire to park (and enjoy) his money in Chilean wineries and Dubai-registered jets than it is for a mere millionaire. Sure, you can buy a little plot in the south of France or a condo in the Caribbean, but it will cost you a much larger fraction of your income to keep it up and travel to enjoy it.

And trusts can shield wealth just as well as they can shield income.

It's effectively impossible to make the top few hundred taxpayers pay an effective rate much higher than 15%. But other than some appeal to fairness, who cares? They're already paying thousands of times over what the median taxpayer is.

It always is the appeal to fairness - if the folks at the top get away with it, it's like Soviet Dachas, Popes with mistresses etc. The top must be made to be equal if society is to be equal.

The how - is what is in the wind - international cooperation.

...if society is to be equal.

What you're missing is that people who are in favor of these kinds of shenanigans tend also to be emphatically against this "equality" rubbish.

"Get away with" paying $56M in taxes annually? That was the average "top 400" taxpayer bill in 2012.

https://www.irs.gov/pub/irs-soi/12intop400.pdf

Life in the U.S. is good, but nobody is getting an "unfair" allocation of all the great benefits and opportunities the federal government provides if they're paying $56M for it.

The average income of the top 400 taxpayers is $335 million/year. Had those people been born and grown up in Bangladesh, instead of the U.S., I doubt it would be 1/10th as much, if that. So $56 million a year doesn't sound so bad for the privilege of living in a society that enables wealth creation like few others.

Neither would $100M or $200M. And for someone making $50,000, paying a 50% effective rate sounds like a great deal compared to living in Bangladesh. I don't think that argument implies anything about what rates should be, which makes me wonder exactly what it's supposed to demonstrate.

Presumably, it's "fair" to tax people somehow proportionally to the amount of benefit they derive from living in the U.S. with its government. If someone would make $10 million were they born in Bangladesh, but make $100 million having been born in the U.S, that excess $90 million is a benefit they derive from the U.S. and it's fair to tax them up to $89 million of that. They're still $1 million better off than the baseline.

Now, that's the limit of what's morally "fair." What's "optimal," taking into account competing developed countries, may be a lot lower. But taxing up to that limit is "fair."

That's a really good argument - and emphasises the value of living in one country over another - very reminiscent of city state style arbitrage.

I feel there is another "fair" - that of paying the same percentage of income or wealth as everyone else. This is easier to explain and appeals to a more monkey brain part of us.

As an example (from the cbsnews link)

  While the tax rate on dividends has since jumped to 20 
  percent for people earning more than $400,000 annually, 
  that's still far below the tax imposed on wages for 
  America's highest earners.

20 percent on dividends !? That can't be right ? In the UK we get the same rate as all other income (40 rising to 45).

Can I move ?

Does your boss ever say to you: "We're having a really bad year. Instead of paying you $50,000, I'm going to have to pull $50,000 out of your savings account"?

That's the difference between taxes on investments and on income. Investors are risking loss in a way that workers are not: If your boss stops paying you, you stop working.

I don't see how the risk is relevant. If you lose $50,000 as an investor, you can carry that forward as a loss to offset future gains.

But society provides an unfair distribution of the benefits of society. A black male born in west Oakland doesn't receive nearly the societal benefit as a white male born to a family a couple miles away in Peidmont. So why should we tax the first guy at the same percentage of the second when the second is receiving extremely more than the first?

What's special about Bangladesh when defining "fair"? Do you mean it as a proxy for somewhere with no significant government benefits or services?

And since Bangladesh's median per capita income is something like $600, it implies that tax rates capturing all but $600 of the median U.S. worker's $51,000 would be "morally fair". 98.8% effective rates!

I don't think a definition so constructed has any significant value.

I use Bangladesh as an example because my family is from there--I can easily estimate the difference between what I make having grown up a citizen of the U.S. versus what my similarly-situated cousins make. But more generally, it's an example of a country that provides internal security, but not much beyond that. It you're starting a business in Bangladesh, you can't take advantage of governmental and social capital: educated workers, wealthy customers, research institutions, etc.

The morally fair tax rate is more like 85%--the median U.S. individual income is around $30,000, while the median PPP-adjusted Bangladeshi income is $3,300. But yeah, that's absolutely fair. Just the simple fact of being born in the United States, keeping everything else equal, gives you a huge advantage in wealth.

In 2012, the top 400 earners reported average income of $335.7 million [1].

$335 million!

The ultra-wealthy get a huge allocation of "benefits and opportunities" from the government, much more than anyone else. $56M seems like a fantastic deal, as it pays for the system that is set up pretty much entirely to ensure these top earners make gobs and gobs of money forever.

1: http://www.cbsnews.com/news/the-400-highest-earning-american...

>But other than some appeal to fairness, who cares?

You mean justice? And other than an appeal to justice, what is wrong with any injustice?

The risk of social unrest grows in approximate proportion to the amount of economic inequality, so the tax policy of a democratic government must be calibrated to redistribute enough wealth to prevent this from happening. That's the practical argument for progressive taxation.

Redistribution doesn't have to mean taking cash from one person and handing it to another. Instead taxes pay for investments like national security, scientific research, infrastructure, education, health care, environmental health, etc. These raise the overall living standard, and if the rich pay a larger proportion of these costs, it is a form of redistribution.

That is the historical lesson: give up some of your bounty or give up all of your life. There's a country that once had such unrest about this that the people built machines to make it efficient to remove people's heads, they had so many to remove. And it wasn't just the rich who got caught up in this frenzy, at least one innovative chemist had his head removed and he wasn't all that well to do.

So yes, it's destabilizing for ultra wealthy to keep trying to take all the marbles.

> It's effectively impossible to make the top few hundred taxpayers pay an effective rate much higher than 15%.

This is a problem that could be solved with sufficient political will. But, since our politicians are owned by these top few, and the government provides the framework under which these top few stay at the top, there is effectively zero chance that this political will could ever materialize.

I completely agree with this. Short of taxing wealth or taxing consumption, like the FairTax proposal[0], there's no way around shelters and avoidance.

I find it hard to hold a grudge against wealthy individuals who minimize tax liability. It's perfectly legal and it's in their best interest.

[0] https://en.wikipedia.org/wiki/FairTax

Taxing consumption doesn't work unless it is somehow international.

Agreed. There are lots of other sticky issues related to the idea of switching to a consumption-based tax. Not arguing that it should be adopted; every system will have pitfalls.

> I find it hard to hold a grudge against wealthy individuals who minimize tax liability. It's perfectly legal ...

What if it was made legal because they bought politicians who made the laws in their favor?

Also, the law isn't moral. Lots of things are legal but completely immoral. Slavery comes to mind as an historical example.

I agree that the law isn't moral, and I don't think that 'buying politicians' is acceptable or moral. I'm not asserting that wealthy people have no moral obligations--they do--but how much tax they should pay as a percentage of wealth and how that number was derived isn't one of them.

Hmmm ... I think everyone has a obligation to pull their weight. If you don't pay your fair share of taxes, other people have to cover it for you.

Sure. What is the fair share? Is it defined in absolute dollars? Is it a percentage of income? A percentage of wealth? Who determines what is the fair share? Are they elected? Is it a direct ballot measure? It's easy to agree to broad concepts when it comes to this sort of thing and horrifyingly difficult to enact practical measures.

> horrifyingly difficult to enact practical measures.

I don't agree. Almost every nation, state, and locality in the developed world and a great many elsewhere have done it.

> Who determines what is the fair share?

We decide democratically. Most of those nations, states, ad localities have been doing that for a long time too.

My own knowledge is limited to a few US states and federal government, but in all of those cases, the same problems described in the NYT article and above exist. Some other commenters here have definitely posted a few good examples of where they feel it works (like Canada.) What are others?

We do tax some wealth: property taxes. There are residential property taxes and business property taxes.

And wealth managers often charge fees based on a percentage of assets (at least for $1/2+ million accounts). So there is precedent for such a system.

The political reality of expanding on this is a different matter. Any change would have to be gradual, because taxation is a huge intervention in market forces. i.e. to just suddenly stop taxing income, and tax wealth or tax consumption would very abruptly change the dynamics of the economy. But we don't have a political system that incentives 10, 20, 50 years down the road sorts of end goals. We have a system that favors the catch phrase of the week.

Some tax systems, including some income tax systems, are more effective than others. It's true none will ever be perfect, but we'll never eliminate murder and other crimes either. However, we can do a better job.

This is my main reason for liking a national sales tax. I know there are issues with consumption taxes (as with all taxes) but it not only encourages savings at lower income levels, but means a ~32% tax gets levied on a pencil and a mega-yacht equally.

This is why we need a land value tax. It's the only form of tax that can actually legitimately be enforced and doesn't lead to economic activity being moved offshore or under the table.

No, the land value tax is one of the most notoriously difficult taxes to properly implement, which is why it's so rare.

(Also, having it in addition to others, instead of making it the traditional Single Tax ruins the whole point.)

No. Valuation might not be trivial, but LVT would definitely be the easiest tax to enforce. Don't pay the taxes on the land you own? You lose ownership.

Ideally it'd be the single tax, but that doesn't preclude it from being useful in conjunction with other taxes. For example, we could start by simply replacing property taxes with LVT, and that alone would spur economic growth.

Tax consumption.

#ProblemSolved