Romney Will Explode the Debt By Trillions

[IchabodPlain]

Double post.

 

[Francesca R]

The issue is that with compound interest you are earning (deriving) interest (read: income) from interest. The claim that all wages are originally derived from labor (wages) fails.

I don't agree with that. Interest from interest is still income from capital from labour.

You appear to wish to show that it is income from income from capital from labour, and that, presumably, there is some cut-off point in multi-period compounding whereby you can "forget" that the income came from deferring consumption of labour income. But that makes no sense. Interest (net of inflation) is the time value of money, or compensation for deferring gratification, if you like. It is a cumulative function of time. That's simply how it works. The more time, the more interest, it is still the same thing. Colloquially, compounding is often regarded as compounding up discrete time windows like months or years, or days, but the reality of all capital income is that it is continuously compounded in infinitesimally small units of time. Where do you say "OK, now it's become interest on interest"? if not never or immediately?

Moreover, why would one want to? Standard Marxian philosophy holds that capital income is anyway illegitimate, and all income rightly comes from labour, and any that accrues to the capital owner is "stolen". Some flavour of this view seems to survive in much political thought whereby capital income should be regarded as "unearned".

That the interest on interest is unearned, even if interest on saved wages isn't, seems to be a derivative of this, which has no more logic than the labour theory of value does itself. Capital earns income in its own right because capital has value to society, and for no other reason than that. Without capital, labour cannot produce anything on its own beyond hunting and gathering. One can object to the distribution of ownership of capital, but that is a separate redistribution argument again, not a valid refutation that capital earns its own income (generates cash flows by itself)

I've shown how tax rates can fall by compounding interest.

With respect, you've repeated the same argument as before. And my refutation is the same as before. Effective tax rate is calculated as the haircut your post tax return receives compared to your pre-tax return. Nothing else. This is black and white really. You are essentially magicking away the pre-tax return and saying we should pretend it did not happen.

 

[IchabodPlain]

I don't agree with that. Interest from interest is still income from capital from labour.

You appear to wish to show that it is income from income from capital from labour, and that, presumably, there is some cut-off point in multi-period compounding whereby you can "forget" that the income came from deferring consumption of labour income.

I would have thought it was easy to tell from my post when I establish a cut off - when the interest is reinvested as principle, it is income not derived from wages.

Moreover, why would one want to? Standard Marxian philosophy holds that capital income is anyway illegitimate, and all income rightly comes from labour, and any that accrues to the capital owner is "stolen". Some flavour of this view seems to survive in much political thought whereby capital income should be regarded as "unearned".

Honestly, I couldnt care less what standard Marxian philosophy says. I don't think any of the above, so it's irrelevant. Rather, I want to treat income, no matter it's source, the same for tax purposes. It is you who wants to carve out favored status for one source or the other. I find that preposterous.

That the interest on interest is unearned, even if interest on saved wages isn't, seems to be a derivative of this, which has no more logic than the labour theory of value does itself. Capital earns income in its own right because capital has value to society, and for no other reason than that. Without capital, labour cannot produce anything on its own beyond hunting and gathering. One can object to the distribution of ownership of capital, but that is a separate redistribution argument again, not a valid refutation that capital earns its own income (generates cash flows by itself)

I never said investment income is/was unearned, so again, irrelevant. In fact, it's the opposite - the income derived from investments is earned, just like that from labor, and so it should be taxed the same. Your responses would make sense if I called for investment to be outlawed orthatit should be taxed at a higher rate, but I'm not, so they don't.

It's blindingly obvious that capital, in this context, earns it's own income - when you add your interest back into your principle, that interest earns interest - it's exactly the benefit of compound interest.

With respect, you've repeated the same argument as before. And my refutation is the same as before. Effective tax rate is calculated as the haircut your post tax return receives compared to your pre-tax return. Nothing else. This is black and white really. You are essentially magicking away the pre-tax return and saying we should pretend it did not happen.

Regarding the bolded: That's exacty what i did in my previous post, which you cut. With investment, your pre-tax income is $5, and $4 without investment. With a 50% tax on wages and investment, your post tax return is $2.50 with, and $2 without investment - same rates, no magic necessary.

 

[Francesca R]

I would have thought it was easy to tell from my post when I establish a cut off - when the interest is reinvested as principle, it is income not derived from wages.

I pointed out the problem with that which is that interest is accumulated at least daily. Non-zero capital gains (or losses) on traded assets accrue every time the price changes. It is wholly arbitrary when principal is reinvested since it is really a continuous function of time. If you established a rule based on a method of reporting/accounting, it would merely incentivise reporting practices that got around it.

Moreover, what difference does it make? It does not change the argument advanced against taxing capital income, which is that if it is taxed then deferring spending is taxed more heavily than spending.

Rather, I want to treat income, no matter it's source, the same for tax purposes.

But this is not the basis for your initial post where you stated: "I don't see [Landsburg's argument for not taxing capital income] as valid, in the slightest.". It is a statement of your desire which does not challenge the argument, nor offer a justification in itself.

It is you who wants to carve out favored status for one source or the other. I find that preposterous.

Just because I understand the reasoning behind an argument (which you apparently think is wrong but have not shown why) does not in any way mean "I want" to do anything and I will thank you not to suggest this. And the reason for not taxing capital income (entirely separate for any other reason to tax it--Landsburg even says this up front in that blog piece) has been given with enough clarity already and calling it preposterous is an invalid response (hand-waving). One more time: If you tax capital income then the tax rate on investment and saving is higher than the tax rate on consumption.

It's blindingly obvious that capital, in this context, earns it's own income

Agreed.

Regarding the bolded: That's exacty what i did in my previous post, which you cut. With investment, your pre-tax income is $5, and $4 without investment. With a 50% tax on wages and investment, your post tax return is $2.50 with, and $2 without investment - same rates, no magic necessary.

No you didn't, and it's no longer clear to me what your numbers are referring to ($5?).

 

[IchabodPlain]

One more time: If you tax capital income then the tax rate on investment and saving is higher than the tax rate on consumption.

No additional income is created when you consume. If I could sell scones on the other side of town for $2, should I pay no tax on my profit? The easy answer is that if one day of deferral is worth more than day of consumption. After one work week, deferral Monday is worth the next week off by Friday. Meanwhile, you're treating the gains made by deferral as if they were derived by income from labor. They aren't - they are derived by the deferral itself. Not unlike how the business above generates extra income (performing a service, and being compensated for it).

 

[Francesca R]

No additional income is created when you consume.

Agree.

If I could sell scones on the other side of town for $2, should I pay no tax on my profit?

Profit tax (corporation tax) is not part of the argument.

Meanwhile, you're treating the gains made by deferral as if they were derived by income from labor. They aren't - they are derived by the deferral itself.

The compensation from deferring consumption is created by deferring the consumption, yes. But the ability to defer consumption comes from having something to consume in the first place so that you have the choice. And if the choice is consume tax free, or invest/save and pay tax, then investment and saving is taxed more heavily than consumption.

You no longer appear to be challenging this.

 

[IchabodPlain]

Profit tax (corporation tax) is not part of the argument.

I don't see how it changes the math provided. In fact, it demonstrates that reinvesting untaxed interest (profit, in this case), leads to lower overall tax bills.

The compensation from deferring consumption is created by deferring the consumption, yes. But the ability to defer consumption comes from having something to consume in the first place so that you have the choice. And if the choice is consume tax free, or invest/save and pay tax, then investment and saving is taxed more heavily than consumption.

You no longer appear to be challenging this.

If the principle is taxed already, then you are correct, and I withdraw my claims otherwise.

However, with compound interest, the numbers do change:

Tax on income at 50%: (d1) 2, (d2) 6, (d3) 14; tax=7
Tax on wages only at 50%: (d1) 1, (d2) 3, (d3) 7; tax paid=3

 

[Francesca R]

If the principle is taxed already, then you are correct, and I withdraw my claims otherwise.

It makes no difference whether capital is taxed already or not. If you have money to invest and spend later, or to spend now, above zero tax on investment results in future consumption being taxed more heavily than present consumption (as I have been repeating several times)

However, with compound interest, the numbers do change:

Tax on income at 50%: (d1) 2, (d2) 6, (d3) 14; tax=7
Tax on wages only at 50%: (d1) 1, (d2) 3, (d3) 7; tax paid=3

It is not clear what this example is.

But I maintain, the claim that positive investment returns reduce your effective tax rate is invalid, and to put it unkindly, smoke and mirrors. Tax rate is [post-tax return]/[pre-tax return] -1

 

[IchabodPlain]

It is not clear what this example is.

But I maintain, the claim that positive investment returns reduce your effective tax rate is invalid, and to put it unkindly, smoke and mirrors. Tax rate is [post-tax return]/[pre-tax return] -1

In the first example, I make $2 on day one. I work, defer, collect my interest, and work again. I now have $6. Do it all again, and at the end of day three I have $14. A 50% tax on total income yields $7.

In the second example, I take home $1 per day and am taxed $1 per day. I work, defer, collect, and work again, I have $3. Do it all again and I make $7, but am only taxed $3.

Also, I would like you to address the analogy to business. I'm usually not a fan of arguing by analogy, but I honestly don't see how it changes the numbers.

 

[Francesca R]

In the first example, I make $2 on day one. I work, defer, collect my interest, and work again. I now have $6. Do it all again, and at the end of day three I have $14. A 50% tax on total income yields $7.

In the second example, I take home $1 per day and am taxed $1 per day. I work, defer, collect, and work again, I have $3. Do it all again and I make $7, but am only taxed $3.

I still do not follow this

 

[IchabodPlain]

I still do not follow this

Well, if someone who has lots of education in mathematics has trouble following, it's probably not a good indication. Nevertheless, I will try again. If I coninually reinvest my first days wage and the interest, I have $8 by day three (2->4->8). My second days wage collects one day of interest doubling it's total to 4 from 2. Add these numbers together (8+4=12) and then add my wages from day three to calculate my total income (12+2=14).

Are you still following?

 

[Francesca R]

Well, if someone who has lots of education in mathematics has trouble following, it's probably not a good indication. Nevertheless, I will try again. If I coninually reinvest my first days wage and the interest, I have $8 by day three (2->4->8). My second days wage collects one day of interest doubling it's total to 4 from 2. Add these numbers together (8+4=12) and then add my wages from day three to calculate my total income (12+2=14).

Are you still following?

Yes, but you have two periods of investment and three payments of wages. There is no option but to "consume" the third day's wages. That rather muddies the exercise IMO, and anyway it was why I did not know what you were doing. I suggest you go back to two days of wages and two days of investment returns. So you have:

Full investor's tax free return after day 1 = $4, after day 2 = $12.

I shall continue . . . .

Full consumer's tax free return after day 1 = $2, after day 2 = $4

50% tax on wages:

Full investor's return after day 1 = $2. After day 2 = $6. Tax rate for day 1 is 50%. Compound tax rate = 50%

Full consumer's return after day 1 = $1. After day 2 = $2. Tax rate for day 1 is 50%. Compound tax rate = 50%

50% tax on wages and 50% tax on interest:

Full investor's return after day 1 = $1.5. After day 2 = $3.75. Tax rate on day 1 = 62.5%, Compound tax rate = 68.75%

Full consumer's return after day 1 = $1. After day 2 = $2. Tax rate for day 1 is 50%. Compound tax rate = 50%

Thus, if you wish to go multi-period and compound returns, I think you compound tax rates as well, and the penalty for investment is ever larger. I suppose this is the opposite of what you wish to show?

 

[IchabodPlain]

Yes, but you have two periods of investment and three payments of wages. There is no option but to "consume" the third day's wages. That rather muddies the exercise IMO, and anyway it was why I did not know what you were doing.

Two days will not show the compounding effects. Extrapolate my numbers to a fourth day,but don't include the wages (end of the third day).

First day: 2->4->8->16
Second day: 2->4->8
Third day: 2->4

Total income on day four before work: 28; tax: 14

Tax on wages only

First day: 1-2-4-8
Second day: 1-2-4
Third day: 1-2

Total income on day 4 before tax: 14; tax: 3

I count three periods of investment and three periods of wages.

 

[Francesca R]

You seem to (again) be not spelling out what you're trying to show.

If your issue is with multi-period compound returns, yet two periods don't show it, then I suspect you're trying to show something a bit . . . iffy.

Why not critique my example? Compounded rates of tax are higher than single period rates, when you consider tax on tax.

 

[IchabodPlain]

You seem to (again) be not spelling out what you're trying to show.

In all honesty, I don't see how what i posted this time is any different from the last time. All I did was correct what you perceived to be the flaw (two periods of investment vs. three periods of wages). I extended it to the end of the third day so that another investment period would accrue creating equal periods of investment and wages (pretty sure you've now got three of each). Don't trust my numbers; do it yourself. I strongly suspect your math skills are better than mine.

If your issue is with multi-period compound returns, yet two periods don't show it, then I suspect you're trying to show something a bit . . . iffy.

I'm not, at least intentionally. Promise.

 

[Cain]

Reagan proved deficits don't matter.

 

[IchabodPlain]

I am being hard-headed. My issue was with the proportion of tax actually paid for the total of income earned. If only wages are taxed, your tax is $1 per day. This $1 actual cost remains constant as long as you work your $2 per day job. Make $20 combined income on a given day? $1 in tax, please.

I simply missed that by taxing a dollar today, everyone loses the additional dollar that would have been created tomorrow and every dollar (compounded or not) after that. Taxing the earnings again only reduces everyone's future take again, and more relative to consumtion (assuming it remains untaxed). Thank you for your patience on this.

There is also the emotional reaction of knowing far too many hardworking schlubs who pay higher rates on their OK salaries than [insert (in)famous m/billionaire(s) here] does. I still think that is wrong, but realize that it is a seperate topic than what we were discussing. I withdraw my objections. Thank you for being polite, and I apologize if I was rude. Put the E in JREF - and in the politics section, no less!

 

[Puppycow]

The latest Obama TV ad hits Romney on his tax plan, based on a study by the independent non-partisan Tax Policy Center:



This should be the main focus of Obama's campaign I think.

ETA: The WaPo Fact Checker approves:

A tough new Obama ad that — surprise! — is accurate

 

[Puppycow]

Calculate the tax effect of the Obama an Romney plans for you!

Compare and contrast

 

[Unabogie]

So wait, not only will Romney's tax plan explode the debt by trillions, but it will also explode my tax bill? So who benefits from this craaaaaaazy tax plan? Isn't there anyone, say, a tiny minority of the populace, who gets their taxes lowered? I mean, if this plan is going to explode the debt AND raise taxes, then basic arithmetic says that someone, somewhere is getting a tax cut. If not the bottom 95% of Americans, then by golly, who does that leave?

Hopefully someone can help me with this conundrum!