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As the so-called fiscal cliff gets nearer, you'll hear lots of talk about whether current tax rates on the rich are fair. As I've said before, fairness is a concept invented so dumb people can participate in debates. Fairness isn't a natural law of the universe. It's a psychological problem.

We sometimes get fairness confused with equality. Equality is usually good, and can often be measured with a satisfying precision. Fairness, on the other hand, is usually just a rationale for some sort of bias.

If you think the rich should pay higher taxes, you probably compare today's rates to years past when the tax rates on the rich were far higher, and you conveniently leave out the fact that few people actually paid those rates because of loopholes and deductions.

If you think the rich already pay enough taxes, you focus on the percentage of total federal income taxes they pay and leave out any mention of taxes the poor pay, such as payroll and sales taxes.

To demonstrate my point that fairness is about psychology and not the objective world, I'll ask you two questions and I'd like you to give me the first answer that feels "fair" to you. Don't read the other comments until you have your answer in your head.

Here are the questions:

A retired businessman is worth one billion dollars. Thanks to his expensive lifestyle and hobbies, his money supports a number of people, such as his chauffeur, personal assistant, etc. Please answer these two questions:

1. How many jobs does a typical retired billionaire (with one billion in assets) support just to service his lifestyle? Give me your best guess.

2. How many jobs should a retired billionaire (with one billion in assets) create for you to feel he has done enough for society such that his taxes should not go up? Is ten jobs enough? Twenty? 

Make sure you have your answers before reading on.

I thought of this question because I heard an estimate of how many families a particular billionaire supports. The estimate was a hundred. If you figure an average family is 2.5 people, one billionaire is supporting 250 humans.  He gets a lot in return, of course, but what struck me is how this number affects my feeling of fairness. When I hear that one person is supporting 250 non-relatives, plus a number of relatives too, it feels as if that billionaire is doing more than his "fair" share.  But as I've said, fairness isn't a real thing. It's just a psychological phenomenon that is easily manipulated.

My personal view is that if most credible economists say higher taxes on the rich are necessary to save the economy, I'm all for it. I think every rich person would agree with that statement. The question that matters is whether taxing the rich will help or hurt the economy. Fairness should be eliminated from the discussion.

 
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Dec 17, 2012
"In the nearly 10 years that have elapsed since that plea, the budget deficit has ballooned,"

Actually, in 2007 the deficit was only $170B. What's changed is spending -- we are now taking in almost exactly what we spent in 2007, but spending about $1.5T more.

The financial collapse of 2008 was not caused by tax cuts or evil bankers, but by bipartisan agreement that 1) everyone should be able to buy a home, and 2) a few large banks are better than a lot of small ones (especially for the regulators who can more easily leave gov't for $MM positions at the regulated). The federal government intervened massively in the mortgage markets to make this happen, and quite deliberately helped hide the risks of all kinds of mortgage debt (remember, this was not considered a bad thing in 2005!); Megan McArdle has cited the actual working papers in which this policy was promulgated.

A few Republicans complained the policy was risky, and were castigated for as poor-hating extremists. Barney Frank and Chris Dodd notably pooh-poohed the risks.

So, what happens when you have your first real recession in 17 years? Suddenly all the weak hands were shook out of the mortgage market, and AIG and other !$%*!$%* deemed "too big to fail" suddenly found themselves insolvent because they were holding worthless AAA mortgage-backed paper. Ooooops.

And so, with the bubble popped, housing prices started their long decline, and ordinary Americans watched trillions in assets evaporate.

This is not how markets are supposed to function. Markets have winners and losers, not TBTF and government bailouts. Sadly, none of this has really been fixed.
 
 
+1 Rank Up Rank Down
Dec 17, 2012
What you're missing is that Jack Shakely is just another known fool and liar at a long-discredited far-left propaganda rag, that even the Democrats and their figurehead in the White House know the Bush tax cuts worked (which is why they're trying to keep them even now), and that actual history (as opposed to lamestream media narratives like Shakely's) proves all 450 of those credentialed fools who opposed the tax cuts were talking out their rear ends.

In fact, Bush's tax cuts greatly cut into the deficit, they proved far more beneficial to the poor than to the rich (though the rich did benefit too), they brought massive economic growth, and they brought a massive increase to government tax revenues. In other words, pretty much every line from that excerpt you posted is the direct opposite of reality.

Notice how he neglects to mention Democrats opposed to those tax cuts have controlled the Senate for 6 years now and the White House for 4; that's because he knows they're to blame for wrecking our economy by taxing and regulating us to deaths. He's hoping your memory is short enough that you'll forget how successful Bush's policies were, and what an economic atrocity the Democrats' policies have been since then.

As for those 450 fools with their tin medals from all those fools on the Nobel Committee and the fools in academia and the media, all their opposition to the Bush tax cuts goes to show is that even if a billion fools with a billion Nobel Prizes and a billion college degrees in Economics were opposed to Bush's tax cuts, he would still be right and they would still just be fools. History has proved repeatedly that low taxes are good for the economy and that high taxes are bad; end of story.
 
 
-15 Rank Up Rank Down
Dec 16, 2012
Excerpt from an L.A. Times editorial written by Jack Shakely:

In February 2003, 450 economists, including 10 of the 24 living Nobel laureates in economics, made a public plea to president George W. Bush not to enact the recent tax cuts passed by the U.S. Congress.

These tax cuts, officially called the Jobs and Growth Tax Relief Reconciliation Act of 2003 but forever known as the Bush-era tax cuts, would not do what they promised, the economists argued. Instead, they said, the cuts would “worsen the budget deficit, increase inequality, decrease the ability of the U.S. government to fund essential services, while failing to produce economic growth.”

In the nearly 10 years that have elapsed since that plea, the budget deficit has ballooned, the gap between the wealthy and the middle class has expanded, and the American economy has spiralled into the greatest decline since the Depression.

History has proved the 450 economists were correct. On Dec. 31, these same Bush-era tax cuts are set to expire. This, we are told in hushed or hysterical tones, could push the American economy off a “fiscal cliff.”

Am I missing something here? Can letting a failed tax policy die be such a bad thing?

###

Adding to the author's points, the Defense budget before 2001 was under 200 billion per year. Since then it has ballooned to 800 billion but Gates and Panetta have helped reduce the number to 600 billion. Automatic cuts associated with falling over the fiscal cliff will trigger an automatic 50% reduction which will result in a value of 300 billion which is still 50% higher than the pre 9/11 value so how can this be a bad thing? Maybe it is time to close American bases from previous wars (Germany, Italy, Japan, etc.)
 
 
Dec 13, 2012
@hbmindia

"Yes, a person should ideally ensure that those after them have the same or better access but he is primarily responsible for his own children, not others' - particularly when the others' parents are begetting two to three children for every one of his own or when the others' parents would rather blow their own money on idle luxuries rather than be responsible for their children's future."

Thats fair enough.
The only points I might add here is that contributing to equal opportunity will affect your childrens future as well, and that under a crisis it should be common sense that those with the broadest shoulders (the rich, essentially) carry more weight. This, again, would also affect the future of their children.
Of course, it doesn't help if you think it goes to waste as government spending instead of smart investing.


"On the contrary, the rich are generally clear that hard work can take you only so far."

Well, of course there's a limit to the effectiveness of hard work.
But its way too easy to say if you e.g already have a long and expensive education behind you. There are many who aren't fortunate enough to even begin to have that kind of access.

Look, I'd be the last person to say that its black and white. There are unreasonable people on both sides of the discussion. But that mustn't result in deadlock.


To Scotts credit, I suppose you could say that with the stakes being so high, the soft argument of fairness should be done away with in favor of hard economic facts. But unfortunately we're deadlocked there too.

Personally, I think its more related to preference anyways.
 
 
+13 Rank Up Rank Down
Dec 13, 2012
[Forcing people to pay for their kids education is also a nice idea on paper but, in reality, will result in a lot more kids growing up to be ignorant crooks than is the case now, not to mention a sharper class division than exists now. ]

This is a really fascinating topic, because it makes absolutely no sense that we are spending about three times what we did (per pupil) in the 1970s, for no increase in NAEP scores -- despite the fact we now live in an age where information is available freely or nearly free over the Internet.

How did this happen? Teacher's unions created a system with no competition that ignores results and rewards seniority -- handsomely. In my state, we will actually spend more on education pensions than on education by 2014. We have one educrat retiring at 55 with a pension that is expected to pay him $27M by the time he dies. In California, it costs millions of dollars to fire bad teachers because the union takes nearly every case to court. NY just puts them in rubber rooms.

And when you ask any failing school what the problem is, they always say "well, it's the parents' fault." So kids in rich neighborhoods do better because they have better parents and since public schools have little to no levelling effect, they actually perpetuate class divides.

Nearly every parent wants their child to go to a good school. Over time, a voucher system like Sweden's will push all schools to fire bad teachers and pay good teachers more, so every kid can have better opportunities.
 
 
+11 Rank Up Rank Down
Dec 13, 2012
If you eliminate "fairness" then you have to ask: what maximizes the long-term good for everyone involved? And the answer is: economic growth. So you want low tax rates, which are generally correlated with higher growth when you look across all countries and times.

Growth is the best thing for the poor in the long run. One of my favorite statistics is that average income of the 1950s is now about where the poverty line sits (yes, adjusted for inflation). By the standards of the 1950s, America today has approximately zero people living in poverty. Why? Because we're far more productive, thanks to economic growth.

Here's another fun fact: you can eliminate the entire deficit simply by returning to 2007 levels of federal spending. I don't remember 2007 being an era of terrible privation.
 
 
Dec 13, 2012
Can we please just enact a flat rate tax and cap spending increases to the inflation rate?
 
 
Dec 13, 2012
@ unmdown

"its only fair that they ensure that those after them have the same or better access (schools, healthcare etc)."

Yes, a person should ideally ensure that those after them have the same or better access but he is primarily responsible for his own children, not others' - particularly when the others' parents are begetting two to three children for every one of his own or when the others' parents would rather blow their own money on idle luxuries rather than be responsible for their children's future.

I know lot of people who scrimp and save throughout their lives so that they can leave their children and grand-children a small grub stake. I know many families that are considered wealthy and people view them with envy without realising that that wealth was made by systematic and disciplined saving and investing over the last three or four generations. On the other side, there are people who dispose off their entire income on fine wineing and dining whilst stating things like "I have given my children a good education. Now what they do for themselves is up to them" which only ensures that their children will remain "hard-working" wage earners like them.

"The illusion that seems to befall the wealthy is that they got there primarily through their own hard work, and therefore don't really owe anything to society."

On the contrary, the rich are generally clear that hard work can take you only so far. It is the poor who over-emphasise hard work, probably due to the fact that they earn their money thru daily/monthly wages. The rich have nobody to impress by working hard. They know that they will either keep and grow their money or lose their money depending on whether they take the right or the wrong decisions. Hard-work has little to do with this.

And the rich do not labour under the illusion that they do not owe anything to society. In fact, willingly or unwillingly the rich are giving much more to the poor than in any time in history. What the rich dislike is that the poor want to grab their money as if it were an unalienable right rather than recognising that they are living beyond their means and being grateful to the rich for shouldering more than their fair share of the load. What the rich dislike is their money being forcibly and unfairly grabbed by a government which pretends to occupy the moral high ground in the search for more votes.

Most of the rich will be happy paying the same percentage of their income as tax as the poor do (even though this will be much more in absolute terms that what the poor pay). But the poor want more - they want to pay less not only in absolute terms but also in terms of a percentage. They do not want to be responsible for their own prosperity and they do not want to take responsibility for their progeny's destinies. The poor want everything the rich have without sacrificing anything that the rich or their parents or grand-parents have sacrificed in their journey to wealth. A family which realises that one is really earning for the next generation rather than themselves will almost always have more money than a family which tries to implement a "every generation for himself" policy. It is simply the power of compounding. The larger numbers kick in further down the line - not in the beginning. But of course, a “hard-working” person would find the idea of leaving anything to the next generation rather than enjoying his own "hard-earned income" quite abhorrent.




 
 
Dec 13, 2012
Reading this blog is like watching blind men fondle an elephant.
 
 
-9 Rank Up Rank Down
Dec 13, 2012
@ Phantom II

"If we are talking federal income taxes, which we are, then the rich do pay a far higher percentage of their income than any other group. Simply, the so-called rich earn (note the term "earn") roughly 30% of the income, yet pay 70% of the taxes."

The rich get most of their money from capital gains and dividends. The taxes for those are much lower than the federal income tax.


"If the government wants them to pay even more, then it has nothing to do with fairness. It has to do with a philosophy that says the rich only get that way by stealing from everyone else"

No. The philosophy is that the rich had access to opportunities thanks to the generations before them, and its only fair that they ensure that those after them have the same or better access (schools, healthcare etc). The illusion that seems to befall the wealthy is that they got there primarily through their own hard work, and therefore don't really owe anything to society. There's nothing wrong with being proud of ones achievements, but to think that you didn't need help from the government directly or indirectly is either arrogant or ignorant.

Ideally, there should be no such thing as government spending, only government _investing_; in order to ensure future growth (which is in line with the philosophy above).
Every time you hear "government spending", consider substituting the word "spending" with "investing". Then check whether the investment actually adds up. If it doesn't, then you're free to call it "spending".
 
 
Dec 13, 2012
Your hypothetical test is far too simplistic.

If your retired billionaire made his money as an honest capitalist, creating goods and services of value, a hell of a lot more than 250 people are "being supported" by him. I mean the people actually working for his ventures, earning a paycheck while contributing to his own net worth. They use their money to buy and consume, which incidentally increases the number of people who can afford his goods and services, fueling his net worth even more. Taking it from another angle, producing superior stuff benefits consumers both directly and indirectly: rivals have to compete in quality and price. That guy could surround himself with unpaid interns and still be a bargain to society.

Now, say your retired billionaire marketed quack medicines, sold overpriced junk to the military, drained corporate and private equity on Wall Street, etc. He could give all his money to orphans and still be a drag on the economy, because toxic businesses tend to create much greater costs than revenues -- but the costs are diverted to the economy as a whole, so there's the illusion of profit (and the reality of something like theft). It's like the guy who steals a car stereo -- what he gets is less than what it costs to repair the car, but that's not his problem.

A pile of money in and of itself says nothing useful about its owner. Society needs to identify and incentivize the genuinely productive -- not the "wealth creating" -- while discouraging and penalizing those who leech on any scale.
 
 
+10 Rank Up Rank Down
Dec 12, 2012
What's wrong with your article:

1. Our nation's economists who have our government's ear are total economic illiterates; there's nothing even remotely "credible" about any of those idiots who still worship at the altars of those fools Keynes and Marx, and are to blame for getting our nation into this mess in the first place. Way to prove your whole argument is full of crap by a fallacious appeal to authority, Scott.

2. Do the math for yourself for once. Projected increase in revenue from tax increases (assuming wishes turn into horses, pigs sprout wings and Hell freezes over): $80 billion. Our country's budget deficit this past fiscal year: $1,200 billion. Our country's total on-the-books debt: $16,000 billion. Amount of spending the national socialist regime currently occupying our White House is planning to cut over the entire next century: $0.00. Chance that continuing these policies will lead to economic collapse: 100%. Chance that raising taxes on anyone will do our country any good whatsoever: -100%.
 
 
Dec 12, 2012
Not surprisingly, I disagree with your premise that fairness is emotional. The word "fair" is clearly defined thusly: "free from bias, dishonesty, or injustice." A fair outcome is generally reached by consensus between the involved parties. When consensus can't be reached, a mutually agreed-to arbiter may be chosen to determine a fair outcome. Failing that, the courts can get involved. But dictating that unfairness is really fairness can only be done by violating the definition of that word.

What we have now is a biased group, to wit our federal government, deciding that they want more money from us in order to give it to individuals and groups that support them. To try to pretend this is justified, they call it "fair." It is not.

Your statement on what the so-called poor pay is flawed. Payroll taxes are for Social Security and Medicare. As such, much of the money will in most cases be returned to the payer. Sales taxes are state level, not federal, so if we're talking about payments to the federal government, which we are, then sales taxes do not fall into that category.

If we are talking federal income taxes, which we are, then the rich do pay a far higher percentage of their income than any other group. Simply, the so-called rich earn (note the term "earn") roughly 30% of the income, yet pay 70% of the taxes.

If the government wants them to pay even more, then it has nothing to do with fairness. It has to do with a philosophy that says the rich only get that way by stealing from everyone else, so it's only right that the government take as much of the rich people's and businesses' money as they can get away with and use it to buy votes. But you'll never hear the administration saying that, because it sounds a little crass, and even some liberals might feel bad if they had to defend such a position. So instead, they are dishonest (go back to the definition of fairness again) and call it "fair." Which it is not.

Your last paragraph is, no offense, foolish. Some economist says a certain segment of income earners should pay more money, and you roll over and say, "Fine with me!" Lordee. The problem we have has nothing to do with revenues. It has to do with spending.

Let me use Scott's method here: if the president gets the increased taxes he wants on individuals and small businesses, guess for how much time that increased revenue will fund the federal government? Six months? A year?

How about eight days. And yes, it will have an effect on the economy. During the presidential election, President Obama would point out that only 3% of small businesses would be affected by his proposed tax increase. Wow! Only three percent? How could THAT hurt the economy?

So here's another guess for you. 60% of jobs in this country come from small businesses. What percentage of small-business jobs are provided by that tiny 3% of businesses who will be hit by the Obama tax increase? One-tenth of one percent? Three percent? Six percent?

Try 50%. Gee, I wonder why the president never mentioned that before the election? So let's reason together: that tax increase will impact half of the 60% of jobs in this country directly. That's 30% of the nation's jobs.

Not only that - remember how the president swore that there would be no tax increases on anyone making under $250,000 per year? Oh, really? What about Obamacare? We're finding new things every day in that that will cost the middle class money, even if it's not directly in taxes.

Did you hear the latest? We just found out that in Obamacare, every individual who has a health plan will have to pay roughly $63 more per year to cover pre-existing conditions. Moreover, every business will have to pay that amount for each employee covered. What do you think that's going to do for businesses who have full-time workers? Think that might impact jobs and the economy?

So here's where Scott should have focused. Rather than on taxes, he should focus on spending. By the time Obama leaves office, it is estimated (and these estimates are always low) that the national debt will be roughly $23 trillion dollars. That's roughly 150% of our GDP.

Think that's bad? Well, our unfunded liabilities make that look like chump change. They're currently figured at roughly twice the amount of money in the world. Break out your checkbooks, world, because we're about to go down big time.

You think the riots in Greece were bad? Wait until the bottom falls out of the American economy, and the entitlements stop. Here's the sad truth: NO amount of taxation will even make a dent in all this. Debating taxes at this point is about the same as debating the best place to put the deck chairs on the Titanic in order to get a great view of the iceberg.

Wake up, folks. Pay attention. Don't accept the class-warfare crap. The rich are not the problem. The government is the problem.
 
 
-10 Rank Up Rank Down
Dec 12, 2012
@happy

[Schools: Once again you pay for it. Public school is a nice idea on paper, but in reality people pay for it with property taxes. It's not really free.]

Forcing people to pay for their kids education is also a nice idea on paper but, in reality, will result in a lot more kids growing up to be ignorant crooks than is the case now, not to mention a sharper class division than exists now. Right now the public schools are imperfect but still provide some sort of chance for a kid who grows up poor to make something of themself. Force families to choose between sending their kids to school and eating and that chance goes away.
 
 
+10 Rank Up Rank Down
Dec 12, 2012
I look at the economy, and perhaps life in general, differently.

I think it's important we reward and penalize people according to what they contribute, and what they do. Taxing the rich is exactly what we shouldn't do.

But people cry out: "How will we pay for the roads? And the schools??"

Simple: If someone uses a road, they pay for that use. If they don't - they don't.

Schools: Once again you pay for it. Public school is a nice idea on paper, but in reality people pay for it with property taxes. It's not really free. And worse, people can't drive better educations by getting the opportunity to pick and choose where to send their kids to school.

Stop it! Let people decide where to send their kids, and pay for it.

Seriously, do you think mommy and daddy will be okay with bad grades if they are paying for it?

For that matter, school should be more expensive for under performers than over achievers.

We need to motivate the right behaviors, and discourage laziness, stupidity, and other things that are toxic to our society's overall well being.

Let's come back to the BILLIONAIRE!

If someone makes a BILLION DOLLARS - that's fantastic! Reward that person. Inspire them to make TWO BILLION! Don't steal from their pie. If they want to give back to society, and I suspect they might, let them structure how to do it. Clearly they've proven they are more competent at dealing with money than the government, so why pass their money into less competent hands?

Second, remember that the more we tax things, the more expensive our things become. This can, in effect, make doing business in our country, with our people, a competitive disadvantage. When this happens, we all lose.

Think about it: If I can make a widget for $10 in the US, but only $7 in Canada, because of taxes, which economy will likely participate in that production?

Why do you think people shoot TV shows and movies in Canada anyway?

So long story short: we shouldn't spend our time feeling entitled. We should instead make sure we are motivating the behaviors that make our society better.
 
 
Dec 12, 2012
All money spent supports others who participate in our economy. When I buy groceries, I am supporting not only people who work at the store, but farmers, truck drivers, etc. Since everyone who spends money supports others, then we should look at the % of money they actually spend.

As people make more money, they tend to save more (not spending it participating in the economy). If this man worth 1 billion only spends 10 million a year to maintain his lifestyle, he only spending 1/100 of his wealth in the economy.

If you look at people who are worth far less, they tend to spent a much larger % of their worth. Sure, a single individual has a smaller impact than the billionaire, but if you added enough poor people together to achieve 1 billion dollars in assets, I would argue they would spend a much higher % of the wealth. They would be supporting MORE people than the billionaire.

Therefore, the billionaire should pay more in taxes because he spends less in the economy.
 
 
Dec 12, 2012
Assuming that the billionaire earned her money legally, then her "fair share" is exactly the same amount (not percentage) as anyone else.

She earned her money by producing something that other people were willing to pay for. She paid taxes on that money. She continues to contribute by spending the money.

BTW: by using the pronoun "she", does it make you more sympathetic to the billionaire?
 
 
-14 Rank Up Rank Down
Dec 12, 2012
Scott, in analyzing the concept of fairness, you've inadvertently taken it out of its context.
The fairness argument is not about economics; its one of morals and its intended for those that haven't become detached from theirs.


That being said,
a billionaire supporting any large number of people is not really paying "fair share". Its a contribution of sorts, for sure, but as long as opportunities favor the rich it doesn't really matter how many the rich support.

True fairness comes if the rich contribute to equal opportunity for all. And whether or not thats fair is a matter of ignorance/arrogance, not opinion.
 
 
Dec 12, 2012
I've got a question to turn the fairness debate around.

Let's say you were the retired billionaire and it was your money that was going to be taken. Which is more fair from the billionaire's perspective:

1. Some idiot who says he knows more than you and then votes via and who bribes him more (campaign donations) that takes your money and says trust him. Then he wastes it on stuff that pisses you off and has questionable value.

2. You are told to either help X number of people or use Y dollars for society's good and then you decide the best way to help people.

3. You realize you have moral obligations and instead of being treated like a child by some know-it-all dogooders paving the path to hell, and decide to help out on your own, in your own manner. You do so so you can have a clear conscience and feel good about yourself.
 
 
+2 Rank Up Rank Down
Dec 12, 2012
[My personal view is that if most credible economists say higher taxes on the rich are necessary to save the economy, I'm all for it. I think every rich person would agree with that statement. - Scott]

I think you're very, very wrong on this one. Yes, maybe everyone would agree with that statement in principle or in a TV-interview, but when it would come to voting for raising the taxes, guess what happens.

It would be interesting to know how much money corporations and rich people throw at Washington politicians to keep things as they are. My guess is tons.

The main issue here is the trust in your government - in principle, the government should take care about all citizens, while corporations (in principle and in reality) mostly care about their owners (shareholders). As I recall, Bill Clinton said that when he was growing up corporations were responsible in equal measure to:

a) shareholders (making them rich)
b) local community (meaning creating and keeping jobs) and
c) society as a whole (or state, or country - meaning paying their federal and state taxes).

Then somewhere in the early 80's (Reaganomics) it all changed and shareholders became the most important thing corporations should care about, while local comunity and society should go screw themselves.

And here we are... Society and local communities are crumbling down, while the rich have never had it better (worldwide, not just the U.S.).

As I said before, the time has come for another revolution - I just hope it will not be as bloody as the revolutions in the past (thanks to the internet).

 
 
 
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