the Air Vent

Because the world needs another opinion

Inequality

Posted by Jeff Id on November 7, 2015

I haven’t been blogging much obviously.  Life is more than a little busy these days.  The boys are getting older and work is getting busier.  With the continuing climate mantra of ridiculous papers studying asinine things like kangaroo farts, calls for cow methane regulation, and the continued failure of the sea ice to melt, climate science has gotten so literally stupid I don’t want to waste my mind on it.   We don’t live forever after all and it seems that skeptical bloggers are hardly required to point out the political idiocy so rampant in the field.  I’m living a rather unusual experience these days as we have made the transition from a startup to a smallish company and now growing to a larger more profitable organization.   Every entrepreneur I’ve met seems to take a different path.  Nearly all larger success stories are generous folks with big hearts who thrive on honesty and doing what you say you will.  I have also noticed that beginning an organization from a cashless unfunded start up gives us a perspective on business that is considerably different from the executives we deal with in large organizations.  On the journey, my partners and I have learned a great deal about regulations, taxation, costs, and unique legal liabilities for others actions afforded today’s business owners.   As you may guess, a lot of it is not good for proper function of a business.

I just watched most of the show Inequality for All by Robert Reich, Bill Clintons labor secretary.  It attempts to make a compelling argument that income inequality is the key problem America faces.   Robert Reich is certainly a good speaker and he had several CEO’s and wealthy investors who were also well spoken on the subject.  I do agree with him that Americans should make more in their jobs, however Robert blamed the discrepancy on low top income tax rates, globalization, technology and too little government investment in education.  While he discusses other pressures he sort of brushes them to the side without much additional comment and instead income tax and education were keys for him.

I can’t really claim the political credentials of a man who spent the majority of his career in politics or making speeches, but I can claim to know what happens in our world, and in our actual functioning business – and I think our reality should carry a bit more weight than a man who has spent his entire life as a professional speaker who has not created jobs or products.

First, lets talk about higher education because America’s once great higher education system has completely lost its way.   I’m not talking the costs right now, but rather the institutions themselves have become centers for the lazy.   They have less to do with transferring knowledge to students (the product) and more to do with grant taking and (everyone gets a ribbon) self-congradulatory accolades for the anointed.   Even worse, they have devolved into political indoctrination farms for the economically radical left-wing folk.

Now with respect to cost, the subsidized University of Michigan costs $30,000 US per year to attend.  The student might have 12 classes during that period so in an undergraduate class size of say 40 students, the total income from students per class taught is $100,000 for a class that meets perhaps three times a week.  This does not include the massive grants colleges receive which in many cases bring that number up to perhaps 150,000 per class if you divide it out that way.  As costs to attend college have risen, the ever compliant federal government doesn’t allow competition for students to take over, they have simply made student loans ridiculously easy to get, such that students are now spending hundreds of thousands on degrees which often times have no real function.   There even seems to be a new push to recognize some of the more useless and easy degrees by giving reduced payback requirements.  At some point we have to begin to question what is a reasonable cost for education, how much teaching should a professor actually do for his or her income.   For instance, the six figure income of Michael Mann is supported through ridiculously oversized grants for his sophomoric work, and he apparently is actually teaching for just 3 days per week and only for two semesters per year.  Yet the unreasonable people in politics continue to claim we don’t “invest” enough in education rather than noticing we are becoming dramatically less efficient at education.   The federal government is feeding both ends of the problem- loans and costs.

It seems cranially inverted to me, but then I’m not living in the shockingly sheltered world of infinite money in a US government university.  I live in the world of business where our products must provide a service, we must compete for that product to be accepted, and if we don’t provide more value than our cost, we go out of business.   Every minute of every day we work to provide our products and services at a better cost to more people.

The entire world is driven by incentivizations.   What I mean is that when you want less of something, you tax it and across the bulk of decision making made by the taxed, you get less of it.  When you want more of something you subsidize or cut taxes, and across the bulk of decision making you get more of it.  This applies on non-cost based decisions as well where positive and negative incentives drive decisions.  When the federal government provides large money to students with no assets that makes it easier to go into debt, they will carry more debt.  When universities raise tuition today due to incredibly lazy work environments, the federal government simply supports what would otherwise be a reduction in student attendance or pay cuts for professors with easier access to loans.  The problem is so severe that it is blatantly clear that the system has created a left-wing pro-government culture with massively overpriced services and equally massively underworked professors.  You get what you incentivize.

So I suppose Reich and I disagree on that but I’m off track a bit.  The movie was about the problem of income inequality, which itself is a false issue.  In the movie, Robert used the very poor unskilled workers and the very wealthy business investors as his examples, claiming that inequality is a huge issue.   The problems poor people in this movie face were obviously not due to the fact that the famous left-wing Warren Buffet made billions whatsoever.   You can redistribute all of the rich people’s money as China did, and the people who are poor will remain so, because there simply isn’t enough value to pass around. The problems the example individuals in the movie faced were not Buffets wealth but rather that they had too little money to have any visible opportunity for savings or any reasonable opportunity for a better life.   I’ve lived that way in the past myself where you must choose between food or new shoes and the $30 you have is all you are going to have for a long while.     When I hear about inequality, it makes me cringe because it has nothing to do with how much a CEO gets paid, it has to do with the VALUE of peoples time.    What does it cost to buy an hour of someones service on the open market. 

While there are plenty of things I can list that affect the cost of labor, the following major factors in the market are keeping the cost of our labor down:

  • Despite marginal economic improvement, supply of labor is still high relative to demand.
  • Working age people not contributing to availability of product and services.
  • Low cost of foreign labor.

These factors all affect the VALUE of a persons hour of work.

What happens to price of a good or service when supply goes up or demand goes down is something everyone knows, you get lower prices.   When supply is lower and demand is higher, prices go up.   The problem of wages is quite simple, supply and demand.   If you have excess labor in the workforce, real wages drop.

The second item above is a little more complex as a huge fraction of working age people in the US are not in or attempting to be in the workforce.  These people are typically not producing anything of value and are supported by government checks.  therefore do not contribute in a positive way to the economy, they become net drains and their negative influence keeps the availability of goods down and costs of goods higher while simultaneously consuming less themselves.  The available goods per functional employee must be a net positive as their consumption of goods is paid for by a fraction of what they produce.   In other words,  they must produce more value than they consume so non-working people are a net negative on the availability of goods driving up cost.

When we can purchase long term foreign labor for $3/hr and minimum real US labor cost of about $17, businesses must absolutely take advantage of this or the competitors will take you right out of the market.   This is not an effect of EVIL businessmen being greedy.  If the bottom line goes negative while trying to maintain competitive pricing, businesses are not governments, and they go bankrupt.   Often fairly quickly and with little fanfare.   In fact, businesses who do not seek out nearly every advantage go bankrupt all the time, and I have to tell you that this particular government with this president don’t give a fart what happens to my business or any other non-campaign contributing entity.   Our bankruptcy, which thankfully we are quite successful currently, wouldn’t even make the radar.

So this inequality the liberals are pounding on about is nothing but a recycled regressive Marxist redistribution style argument, that the poor people who work are not making enough and the rich make too much and it is the fault of the rich.   It is completely unfair and ridiculous to blame those like myself who work every weekend, evenings and early mornings, who are vastly more productive, create products of real value, should somehow not be compensated lavishly for successful results.   My partners and I certainly won’t be well compensated if we fail, hell we aren’t even allowed unemployment checks and we are the ones taking the risk.  Our employees won’t be terribly happy if we fail either.

But what about the ultra-wealthy.  The Trumps, Bloombergs and the Buffets of the world.   Certainly they hold too much value.   Robert Reich is of the opinion that they don’t spend enough.  They hold their money and THAT is somehow the problem with the world.   If they spent more (or perhaps were forced to spend or had their money taxed away), the money would flow more and the non-productive or low productivity people would be better off.   The false argument was made repeatedly that their tax rates were lower than any time in history, that despite their massive incomes, the taxes they paid were in the sub 15% range.   There is a lot to discuss about holding up the circulation of money, but it isn’t a zero net for the economy when it is stuck in a bank or re-invested in the stock market.  The argument Reich makes for taking money from the wealthy was incredibly oversimplified and completely wrongheaded.  Were releasing the cash such a big requirement for the economy, the giant piles of printed economic stimulus money which has never made it into the economy would be a solution rather than an inflationary ax waiting to fall on our economic necks.

While it is true that the wealthiest of investors reported taxes are that low, they are making the taxes through investment in corporations.  This gives the corporations operating cash to grow larger and these corporations gain value through various maneuvers which create profits.  Those profits are taxed at what I believe is the highest actual rate in the world today and any value remaining after tax causes the value of shares of the company to fluctuate up or down.  I’ll do some research on that rate and see if our tax leadership status has changed.   If profit goes down or negative news occurs, the investor loses their money, if it goes up, they gain value which if they are successful enough, and the stock prices perform, they can sell the stock for a profit on the corporations previously taxed profit and they receive a SECOND tax called capital gains — currently 20% of the amount gained.

Now think about this.  The money is taxed twice and only reported on the investors personal income FORM once, the rest of the influence of the invested money is taxed on the corporations tax return.  It makes the effective government tax collection rate on Warren Buffets money, higher than it appears to be on the investors balance sheet — but there is more.   Building a manufacturing company is difficult.  Our tax rate approaches 60% because of the dozens of layers of tax, our high growth, and the fact that certain things must be capitalized and depreciated.  In a growing company, the tax depreciation system creates a continuously increasing zero interest loan to the state and federal government based on unrealized income.  Despite the happy feelings that gives the high tax folk, you typically don’t get it back either as the company eventually will fail or be sold and fail later and there is no income against which you can depreciate the expense.  The result is simply that we have a tax rate which is much higher than is reported to the public.

More importantly, the capital gains tax is what is applied to a business being sold.   If the business gains value from the time of purchase to the time of sale, you pay capital gains on that increased value.  Keep in mind that the business has been paying at a 60% rate all along and then when sold, if it has anything of value to sell for, you are taxed a second time on the value of that sale.  Again, it is a second tax and certainly a large one considering what odds we face to keep a business from failing.

What does it do to the true stock value of a business if capital gains taxes on the sale of that stock are doubled? 

Will an increased capital gains tax encourage or discourage investment in US businesses?

Will reduced investment levels and the subsequent growth create more demand for employees?

Will income of the poorest people increase or decrease when there is less investment in the production of goods and services and less demand for jobs?

The answers to these questions are very clear, yet Robert Reich and many on the left don’t seem to want to grasp the situation.  Instead they attack a few high visibility billionaires ridiculous pay levels, or the fact that hedge fund managers are taxed on their income for other peoples investments at capital gains rates (the left is correct on fixing this item), but none of that IS the problem with the poor.  Nor will it make one scrap of positive help on the actual issue of the low end worker not having enough money.  Artificially propping up the bottom of the pay scale by minimum wage laws to levels almost nobody pays anyway, marginally decreases demand and subsequently marginally reduces the value of an employee’s time.  You get the opposite of the higher wages we all want.  It is also a non-solution to the real issue which is one of supply and demand for the low-skill employee.

Now we know from the cigarette and carbon tax fiasco’s that if we want more of something we tax it less or subsidize it (reduce the cost of the good or service) and if we want less, we tax it more (increase the cost of goods or services).  If you want to solve the low income problem (again the problem is not inequality), we need to as a country, commit to a stable pro-business reduced cost, tax, and regulation environment, such that people like myself (or perhaps you) who are crazy enough to take a ridiculous chance on starting a business, succeed at our efforts more often than we currently do.   What is better than that, and we see from the fact that the dollar continues to be reasonably strong, is that we don’t even have to be ACTUALLY good for business.  We just have to be better than much of the rest of the world, and the money will flow in to America in literal droves.   Demand for workers (especially skilled workers) will skyrocket.  Employers like myself will be forced by supply and demand to pay higher wages to keep our trained people.  The poor in America will continue to operate well above the median income of most of the rest of the world.

Now note, I said reduced cost and mentioned both tax and regulation.   Regulation favors the large company.  We struggled mightily with regulation when we were at the 20ish person employee level.   We are much larger now and can afford some of the additional costs of regulatory compliance but navigation of the rules is a massive burden on a corporation and this administration has added a very large additional burden for reporting, compliance, liability and necessary insurances to cover ourselves.  We talk regularly with 4 lawyers, and have multiple others we deal with.  All of these are costs, and while some is necessary, all costs are reductions in the  success level of American business and these costs often DO make the difference between success and failure.

Finally, the movie makes the point that we are at one of the lowest tax rates in the century.  Robert Reich put up a graph of the percentage paid by top earners for his proof.   The commentary which went with his graph can only be described as dishonest.   When deductions, and expenses are taken into consideration, America is at or near the highest percentage of collection rate our government has achieved.  I will take time before the election cycle to plot this again for people as I expect the lies on this subject to continue growing.  Taxes on the wealthy are currently high as deductions of expenses such as state tax or home interest are actually considered income on the federal tax. The situation is ridiculously convoluted and Reich owes his audience an apology for that dishonesty. The second tax reported on Warren Buffets personal return is not high, but again, it is not the whole story of taxes he contributes to our government by any means, the rest of his tax just lands on a different piece of paper.

This post has grown much longer than I intended but there is a lot of real information here.  I can write on about how regulation favors the ultra-wealthy and even high taxes on business capital gains favors billionaires who would definitely pay more.   The points I make above are facts as I know them.   It is extremely clear what it would take to increase the wages of the lowest earners, and it has not one thing to do with Marxist style redistribution.  We need more demand for employment and less strong government incentives for functional individuals to stay home and not contribute their available productivity.  Reduce some of the regulation on businesses, i.e. healthcare, environmental, employment liability, reporting requirements, tax complexity, capitalization taxes, and stop the added cost of insane EPA regulation on the energy industry —  and of course restructure taxes such that Americans get the best value for their money by investing here rather than holding money unused in other countries.

 

 

 

 

 

 

 

 

 


49 Responses to “Inequality”

  1. omanuel said

    Thank you for your analysis of inequality. There are “two sides to every coin.”

    In my youth, I was judge mental and contemptuous of those who were “lazy” – not blessed with a lot of energy.

    Today I am grateful for the many blessings I received as one of the inhabitants of this beautiful, bountiful and benevolent universe.

  2. jinghis said

    The government is simply insane, but you know that already. You are simply a tool that the government uses, same as Robert Reich and me.

    The Fed’s devaluation of money has completely destroyed the wealth created by the country. Our real wealth can be determined by the real interest rate (inflation adjusted), which currently is hovering just above zero.

    No one can win this game, all we can hope for is that the Fed can keep kicking the can down the road until we don’t care any longer. As long as the Fed can keep the interest rate hovering here we are fine and there isn’t any reason why the Fed Can’t. Of course there aren’t any reasons why the Fed Can either. We are so Screwed.

    I like the climate games, because they are an escape from the real world^^

    • dhlii said

      The Fed’s devaluation of money is economically damaging as it distorts our perceptions and it diminishes the value of money as a store of wealth, but it does not actually destroy the real wealth of the country.

      Our real wealth is what we produce. For all its myriads of problems – including the disincentives to produce that inflation creates, it does not atleast not directly alter the total value produced. Only prices.

  3. page488 said

    Well said!

  4. Ron Clutz said

    Yes, the value of people’s time. Someone observed that the places in the world where energy is scarce and expensive, people’s time is cheap; and where energy is cheap, people’s time is valuable.

  5. Jeff Id said

    I should also have added the concept that compared to large systems like planetary energy balance, the economic prosperity of the world has proven to be quite delicate and easily disrupted. America’s poor are much much better off in today’s world than 200 years ago where you would actually starve if you didn’t produce anything of value. When there are people who cannot work enough to provide for themselves and they ARE providing some service, we have already gone too far with measures that repress the economy.

    And in Michigan and many other states, the unelected EPA created laws which is forcing the shutdown of 9 coal plants next year and has no plan to replace any of it. They now create law, enforce law, collect tax in the form of fines and all for extremist causes which promote their own personal power. Economics don’t matter to the protected in government.

    • dhlii said

      Economic growth, is the rate of increase in the value we produce.
      Growth rates except in rare instances are small usually single digits.
      But their effect over time is enormous. The difference between a growth rate of 2% and 4% over a generation is greater than every single social safetynet program ever conceived.

      And the large consequences of these small changes in growth are the reason that the economy is delicate.

      Yet when we listen to our political class – few if any talk about growth, and of those few, only a small number have any clue about growth.

      Without growth – everything Reich and the rest of the left seeks, even if accomplished will leave us worse off.
      With strong growth, but absent everything else that the left fixates on, we will be far far better off – even those at the very bottom.

  6. Hi Jeff,

    Robert Reich is a moron, and one doesn’t have to look too closely to see that. I agree that income taxes on C-corps are crazy, and when combined with taxes on dividends represent double taxation; a single tax on the same money, either on the corporation for non-distributed profits, or on the individual for distributed profits, is a more reasonable approach. S-corps (and other singly taxed organizations) are not in the same category, since they don’t pay income taxes as corporate entities. You can argue that the total tax take for the individual owners (Federal, State and local) is too high, but that is a different issue. I agree that depreciation of capital assets is poorly implemented, if only because it does not take inflation into account…. so investments with long depreciation schedules are not fairly depreciated against ongoing income, and so effectively convert a significant portion of invested capital into taxable income over the life of the asset. This for certain discourages investment in equipment with a long service life; if inflation increases, much of the value of capital investment is converted in a few years to taxable income so long as a business continues to operate profitably.

    But I have to disagree with you on capital gains rates. There *is* every reason to adjust the value of capital gains to reflect underlying inflation (at 2.5% inflation, the “value” of an asset automatically grows by 66% in 20 years). It is nuts to tax “capital gains” without an adjustment for inflation, and the higher the rate of inflation, the nuttier it becomes. However, if the impact of inflation is properly accounted for, I can see no justification for treating capital gains income any differently from normal income. There is no reason a wealthy person who earns the same amount of money from stock market transactions as (for example) a medical doctor earns from his/her labor should have to pay a much lower rate of tax. I agree that lower overall rates and a simplified tax code would help the economy grow, and that regulations are becoming ever more costly, destructive, and stupid. I just can’t buy into special low rates for capital gains income.

    • Jeff Id said

      “. However, if the impact of inflation is properly accounted for, I can see no justification for treating capital gains income any differently from normal income.”

      Well because it is invested money that has already been taxed. It’s like the argument that we must tax capital assets and depreciate.. why? I don’t have a clue why people think that is so normal. There was a time when it was not normal and it really encouraged investment in infrastructure. I would much rather send 500K toward equipment than to the government, and that equipment would create jobs which the government could then tax. The differential can be made up when people take the money as actual cash income rather than the pseudo-income the IRS operates by.

      The whole argument becomes a lot easier when we realize we are on the downward side of the Laffer curve. We have hired and grown dramatically less than we would without the government taking such a huge fraction of our capital.

      • Anonymous said

        Jeff,
        Yes, the investment was originally taxed. But that investment is not (excluding inflation) taxed a second time; only the gain is being taxed, not the original investment. Perhaps I don’t see what you are saying. Please note also that capital gains are only taxed when realized, not when generated. Which, combined with crazy double taxation of dividends, means corporations have historically maximized shareholder value by minimizing dividends, and using retaining earnings to grow company assets. Shareholders then reduce net tax burden by selling shares and taking their profit as capital gain at reduced rate. It’s a bit like a tax deferred saving account.😉 Berkshire Hathaway doesn’t declare dividends.

      • Jeff Id said

        The value of the company is often a multiplier of income. The investment is intended to improve the income, which the company pays taxes on. The remaining balance of income is used to grow the company but the growth you invest in has already been taxed as income. Theoretically, were the investment not there, there would be less income to tax and the difference in tax receipts the government realized is created by the investment. Selling the shares or company for a hopefully higher value is the second tax on the investment.

        Look, I’m not saying there should be no tax on capital gains, I’m just saying that the actual tax on the investment is higher than what is reported on the individual returns. I’m also going to say that taxing at personal income rates makes no sense to me as the double tax would guarantee that investments are always taxed at a higher rate than personal. I very much prefer a very low capital gains tax to encourage foreign investment. I would also like to see a dramatic reduction in the amount of tax charged for purchase of capital equipment. These things would result in strong job creation in our own company and for that reason I’m pretty sure the rest of the country would see similar results.

        • Joe Born said

          Roughly, we can eliminate double taxation and partially reduce the inflation problem by retaining corporate taxation but letting corporations expense dividend payments. That tends to encourage payments to shareholders at a time closer to when the profit was actually earned so that inflation is less of a factor, and it allows income taxation at a marginal rate dependent on the individual’s income (if, unlike me, you want to retain graduated rates).

          Still, an inflation adjustment still seems necessary. If I sell my lot in Phoenix today for twice what I paid for it five years ago. There would be no reason not to tax that as ordinary income–so long as there’s an inflation adjustment and I could also have taken the capital loss fully (or at least to the extent of offsetting other income, and, of course, retaining a carryover) if I had instead sold it for half what I bought it for.

    • jddohio said

      SteveF: The reason to tax capital gains at a lower rate than wage is income is because those who are eligible for capital gain treatment have risked a loss and their own money to obtain the capital gain. Those working for wage income don’t have a risk of loss.

      JD

      • Joe Born said

        That may be a reason, but lower capital-gains rates are an extremely blunt instrument if that’s what we want to address. If we instead made capital losses fully deductible, the risk of loss could largely be taken into account. True, we probably would want to allow capital losses only to the extent of other income (of any type), but perhaps carryovers and, say, arrangements by which a net income loser could sell the losses to other taxpayers to offset their income could largely make up for that frictional problem.

        • I agree completely. There are much better (less economically distorting) ways to handle capital gains.

        • jddohio said

          Capital gains and Wage Income are very distant cousins and should not be lumped together. I would say they have as much in common as a veterinarian has with a physician. A $50,000 gain on a $200,000 investment in one year is exceptional. $50,000 earned as wages is not. However, not only is the $50,000 gain on the $200,000 exceptional, but the investor of the $200,000, in most cases, risks the loss of the $200,000 in trying to get a return of $50,000. Tax treatment of people who risk their assets to earn money and those who earn wages should be very different.

          JD

          • Anonymous said

            JD Ohio,
            Everyone understands the risk issue. Risk depends on the investment choices, with higher risk generally (not always) associated with higher rates of return. Investors are perfectly aware of this, and more sophisticated investors minimize overall risk by assembling a portfolio of investments with mostly uncorrelated risks. I don’t think reward for risk is a significant issue. I do think that special low tax rates for realized gain have the potential to add volatility…. calling a 1 year investment ‘long term’ for tax purposes is almost Orwellian. Calling hedge fund management fees (earned income!) capital gains IS Orwellian. I suspect this is a case were we are not going to ever agree.

          • jddohio said

            Anon: “Everyone understands the risk issue.”

            Definitely not true. About 2 or 3 years ago, the NYT had an article about taxation where comments were activated. One commenter challenged anyone to give one reason why capital gains should be taxed differently than wage income. He received 1000 likes. I commented about risk late in the commenting window — about 36 hours after the article appeared — and until my comment appeared, not one person commented about the risk issue in capital gains taxation.

            Let me give you an example of why capital gains are so different from wage income. My father bought 40 acres of land in Northern Collier County Florida (Naples) in about 1966. (I think for $15,000) At the time, it was an undeveloped area. In approximately, the mid-1970s, the Federal Govt. started imposing severe restrictions on “wetland” development. When my father was in his early 70s in about 1988, I started trying to see if the land could be sold. (Naples was an extremely fast growing and wealthy area in the 1980s) In fact, the County planned a 6-lane road through my father’s land.

            From 1988 through 2000, we actively (basically me) tried to sell the land, but got 0 offers because 90% of it was supposedly wetlands. (To be considered “wetlands” under federal guidelines all that has to be shown is that there is water within 12 inches of the surface for 10 consecutive days at any one point in the year ) Every August, I took what should have been my vacation, to go to Naples and kick the tires regarding my father’s land. I found out that to have any hope of selling the land, we had to have environmental engineering studies done, which would have cost about $50,000 to $100,000. Even then, we would have 0 knowledge of what the Army Corps of Engineers would do with the studies or what they would allow. My father couldn’t afford to spend that much on speculative studies.

            I, a lawyer, kept on kicking the tires. Finally the County, after fighting the feds for about 12 years got reasonably close to building the road. (and in fact, the road was built later) At that time (2000), a Catholic themed educational organization became interested in buying the land with other adjoining parcels to build a school. (The density of building on the adjoining parcels could be increased by combining them with my father’s parcel.)

            My father sold the land to the school for 92 times what he paid for it. (without adjusting for inflation). You would think that the rate of return was amazing, which it partially is. However, it took a huge amount of (free lawyer) work and there turned out to be great risks. There is no way the large amount of money he made should be lumped in with wages. To show just how risky this was, about 18 months after we sold the land, environmental rules were made even tougher, which would have drastically reduced the value of my father’s land. I should add that from 1966 through 2000, my father was paying property taxes while earning absolutely nothing on the land.

            JD

  7. wert said

    There is no such thing as double taxing. But there are too high taxes, and too low.

    Taxes limit the income (and outcome) ‘equality’. Complete equality means kind of communism and minimal production. Unequality leads to different and same problems, loss of productivity for example.

    Denmark is a pretty nice place compared to Russia.

    • kuhnkat said

      The gap is narrowing. Denmark had the advantage of being in a group that was protected and did not spend large amounts of its wealth on military and police. That is changing to the worse.

    • Jeff Id said

      “There is no such thing as double taxing.”

      I’m not sure what you mean. I just gave an example of double taxing above. I can give another for you. When you make enough money (according to the IRS) they don’t allow you to deduct your state tax payment from your income and they tax your tax money as though it went into your pocket. Seems like a double tax to me.

      Liberals who see Denmark as a utopian government don’t recognize that Denmark is a tiny group of people in a unique situation. America is a pretty nice place compared to Denmark.

    • hunter said

      Kuhnkat,
      Please tell the millions of Americans who pay income taxes on dividends they receive that that money is not double taxed. Dividends which are after tax distributions.

  8. stan said

    As for redistribution, governments in the US spend an average of $21,500 per year for every single person living in a household at or below the poverty level. That’s from a few years ago. Obama has estimated that it is rising to 25 grand per year within a few years.

    Note, this does not include the value of charity from churches and charities like United Way, Second Harvest, and thousands of others. It also doesn’t account for the income earned by the households, reported and unreported, legal and illegal.

    Reich wants to argue that 100 grand a year for a “poor” family of four plus charity isn’t enough support from society for a family of four reporting an income of $24,250 or less. I would argue that such govt spending and our substantial contributions to charity are pretty generous.

    I’ve had liberals argue that the poor don’t get the benefit of all that spending. In that case, fire all the Democrat party workers who are employed by government to hand out the cash and manage the benefits. Just give the cash directly to the poor.

    • hunter said

      Stan,
      That is what I thought about all of the failed Obama-era stimulus programs: If each American had simply been given that money pro-rated, with some sort of income cap exclusion, the economic boom would still be reverberating.

  9. Joe Born said

    JeffId: “More importantly, the capital gains tax is what is applied to a business being sold.”

    Although you probably have a point there, I’m not sure that you are saying anything more than what you already said: We shouldn’t have double taxation. Or are you saying something more?

    Suppose we could expense everything–from machine-tool purchases to dividend payments–on a cash basis, and I start a business to create a machine that costs $50,000 in materials and $200,000 in labor to build and test out, It produces widgets that I can sell at a $500,000/year profit, and I sell the resultant business for $5,250,000. Why should I not pay taxes on that $5,000,000 profit (and allow the new owners to take the $5,000,000 deduction against the $500,000/year they will make)?

    Sure,there would have been more of an incentive if I knew that selling the business would not result in taxes, but that’s true of everyone: there’d be more of an incentive to work if we didn’t have to pay income tax.

    Again, I’m sure that the tax code presents problems when a business is sold. I’m just not sure which problems you’re talking about. I recognize that the tax environment I described is imaginary, but what I’m trying to get at is whether you see a tax problem in the sale-of-business situation that’s over and above the usual double-taxation problems.

    • Jeff Id said

      I don’t have a problem that capital gains tax exists. I was simply trying to make the point that these investors are paying a hidden tax as well which is reported on the corporations tax documents. Therefore Buffets claims of super low taxation do not accurately represent what he is really paying. He uses it to make the argument to try and increase capital gains tax. If he succeeds, it makes investment more risky and will deter some of the higher risk investment from even occurring. People will want to invest their money in a more stable large stock – like Berkshire Hathaway for instance – and not in a smaller less known competitor of Berkshire because any drop in value (risk) has to be offset by a bigger gain (reward) in another stock to cover it. In other words, Buffet is campaigning on a false tax notion to create even more barriers to market for the little guys. Rules favor the big corporations in all cases because the burdens little guys face are massive. Pay a lawyer $500 an hour when you are a 10 person company and the reality shows up very quickly.

      Increasing capital gains only favors the super wealthy. They kept it lower for low income people but again, that doesn’t help small organizations who try to raise capital on the private market. You might need a million dollars and by law only be allowed a small number of shareholders. These folk aren’t low income folk so their risk reward for investing in your company is what they are manipulating. They will be MORE likely to chose the large stable growth company under a higher tax regime.

  10. @Jeff Id,
    “With the continuing climate mantra of ridiculous papers studying asinine things like kangaroo farts, calls for cow methane regulation, and the continued failure of the sea ice to melt, climate science has gotten so literally stupid I don’t want to waste my mind on it.”

    The “Greenies” have overplayed their hand. They have persuaded governments around the world to spend trillions that have made the rich richer and the poor poorer. That is the only significant result of spending astronomical sums of money to “Mitigate Carbon” and thereby prevent “Global Warming”.

    With every year that passes it becomes obvious that human prosperity depends on fossil fuels and we won’t accept a North Korean lifestyle except at the point of a gun. Tyranny is the antidote to prosperity. IMHO the Keeling curve will continue to soar but the rising levels of CO2 will fail to bring the promised warming.

    There has been no warming for 19 years. It seems likely that 2016 will come close to matching 1998 (the “Hottest Year on Record”according to RSS and UAH) and thereby end the “Pause”. Yet one swallow does not a summer make or one El Nino a warming trend make.

    You don’t blog much any more. Likewise with “Digging in the Clay” and several other excellent blogs. You don’t need to as nobody believes in “Global Warming” anymore. The political opportunists who benefited from this scam are coming undone before our eyes. Mother Nature delights in embarrassing learned nincompoops and pompous clowns such as Al Gore, Prince Charles and Barack Obama.

    • kuhnkat said

      “Yet one swallow does not a summer make or one El Nino a warming trend make.”

      It is possible that this super El Nino is a Faux one. The high temps may be due to the fact that the warm water is not being pushed into the warm pool on the western side of the Pacific. Without the recharging of the warm pool the knock on effects from this super El Nino will be super small…

      Help me out if you think I am off base here.

      • This El Nino is a little different given that Florida is supposed to be cooler than normal whereas the rest of the country should be warmer.

        Here in Florida we are still getting temperatures in the high eighties and even some nineties.

        What does it mean? Way above my pay grade.

  11. Undeniably believe that that you said. Your favourite justification seemed
    to be at the net the simplest thing to take note of.

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  12. hunter said

    Robert Reich is a small minded man, short on original thinking. He is living the life of the 1%, and in effect wants to piss down on us and tell us it is just a warm rain.

  13. Alan McIntire said

    Poor hunter gatherer societies are economically equal. With any increase in wealth over the hunter gatherer level, you automatically get income inequality.

    Someone making a hundred million dollars a year may be making over 1000 times as much as me, but he or she does not spend 1000 times as much on food or clothing or shelter. Most of their wealth goes into factories, stores, etc where they hire workers and make products that people, even the poor actually WANT and are willing to spend money on- things like i pads, cell phones, online movies, cars shoes, etc. In contrast, government spends money on what they think is good for you, not what you actually are willing to spend money on- things like the US post office, the DMV, Solyndra, the ACA, etc.

  14. stan said

    Jeff, Why does global warming only cause Muslims to be terrorists? — Redstate

  15. squid2112 said

    Great post Jeff! … I really liked it!

    One thing I would also point out, as you state towards the end of your article, you describe how regulations help the big corporations and the uber wealthy, which is true, and can be clearly seen by who lobbies in Washington for more regulations. The biggest sector of lobbying FOR regulations comes directly from the big corporations and ultra wealthy. This is by design. They are not stupid when it comes to trying to protect their power and wealth. Large corporations encourage further regulations as it keeps their competitors at bay. The large corporations can deal with the regulations while their smaller competitors have a much more difficult time. They use the power of law and government to protect their near monopolies, a very common practice through the ages.

    • Jeff Id said

      squid2112 – I really appreciate your reply too. I was considering writing another post on the issue you brought up (one which Fiorina mentioned in the debates) regulations favor large companies. There is a reason Buffet and large C corps contribute to left wing more than conservatives and surprisingly enough it isn’t because they want to make less money.

  16. GHowe said

    Great opening couple of paragraphs Jeff, I will read the whole post when I have more time. Glad to read of your companies continued success. Apologies for the following slightly off topic jokes I am forwarding….Happy Thanksgiving!!!
    Most importantly, I hope you have a successful deer adventure this year.

    Copied off Yahoo! Pretty funny. (If you are smart. hahaha)

    – Hide quoted text –
    A physicist, a biologist and a statistician were out hunting when they
    came upon a deer. The physicist shot and missed 5 feet to the left of
    the deer. Then the biologist shot and missed 5 feet to the right. The
    statistician put down his gun and cried, “We got him! We got him!”

    Einstein, Newton and Pascal are playing Hide and Seek. It’s
    Einstein’s turn to seek, so he covers his eyes and starts to
    count.Pascal runs off and hides, but Newton simply draws a 1 meter
    square on the ground and then stands inside it.Einstein finishes
    counting and opens his eyes. He immediately sees Newton and calls out
    “I found you, Newton. You’re it!”Newton smiles and says, “No you
    didn’t — you found a Newton over a square meter. You found Pascal!”

    Q: How do you tell the difference between a chemist and a plumber?A:
    Ask them to pronounce “unionized.”

    Did you hear about the man who was cooled to absolute zero?He’s 0K now.

    A software engineer is heading to the grocery store and asks his wife
    if there’s anything she wants him to pick up. She says, “Get a loaf of
    bread. And if they have eggs, get a dozen.”He comes back with twelve
    loaves of bread.
    Q: Why do engineers always confuse Halloween and Christmas?A: Because
    Oct 31 = Dec 25.

  17. GHowe said

    Great opening couple of paragraphs Jeff, I will read the whole post when I have more time. Glad to read of your companies continued success. Apologies for the following slightly off topic jokes that I am forwarding….Happy Thanksgiving to y’all and your’s.
    Most importantly, I hope you have a successful deer adventure this year.

    – Hide quoted text –
    A physicist, a biologist and a statistician were out hunting when they
    came upon a deer. The physicist shot and missed 5 feet to the left of
    the deer. Then the biologist shot and missed 5 feet to the right. The
    statistician put down his gun and cried, “We got him! We got him!”

    Einstein, Newton and Pascal are playing Hide and Seek. It’s
    Einstein’s turn to seek, so he covers his eyes and starts to
    count.Pascal runs off and hides, but Newton simply draws a 1 meter
    square on the ground and then stands inside it.Einstein finishes
    counting and opens his eyes. He immediately sees Newton and calls out
    “I found you, Newton. You’re it!”Newton smiles and says, “No you
    didn’t — you found a Newton over a square meter. You found Pascal!”

    Q: How do you tell the difference between a chemist and a plumber?A:
    Ask them to pronounce “unionized.”

    Did you hear about the man who was cooled to absolute zero?He’s 0K now.

    A software engineer is heading to the grocery store and asks his wife
    if there’s anything she wants him to pick up. She says, “Get a loaf of
    bread. And if they have eggs, get a dozen.”He comes back with twelve
    loaves of bread.
    Q: Why do engineers always confuse Halloween and Christmas?A: Because Oct 31 = Dec 25.

  18. dhlii said

    Thank you for a very perceptive article.

    Still a few nits to pick.

    You conflate price, value and cost in numerous places.

    The most critical of these – value, is what matters. Standard of living increases when we increase the value produced. While there are vague relationships between value and price or cost they are not the same, and using them interchangeably is the cause of much of the confusion of the left.

    Moving a job with low skill requirements to a less developed part of the world, decreases prices and decreases costs – but it increases value.

    It is irrelevant how hard you work – regardless of whether your measure that in hours or some other metric. What matters is the value you produce.
    A man with a shovel works harder than a man with a backhoe, but the work of the latter produces greater value. Further, it should be self evident that the backhoe (capital) made a far larger contribution to the increase in value, than the greater skills of the backhoe operator.

    A major contributor to the IE nonsense is the left wing nut belief that all gains in value produced (productivity) are do to and should acrue to labor. That is false. And as you noted incentives matter. Fail to reward the productivity gains from capital and you will get neither those of capital or labor – and our standard of living will improve far more slowly.

    Subsidizing something does not inherently result in more of that thing.
    It can just as easily result in a higher price(not value) for that thing.
    That is much of what we have seen in education – at all levels.
    We have increased subsidies in the expectation that we would get more and better education. But the primary change has been the price has increased.

    Your assertions regarding what is driving down the cost of labor are totally wrong – because of the confusion between price and value.

    Absent incentives to not work the supply of labor and the demand for labor will constantly and dynamically seek equilibrium.
    As you note people respond to incentives. Anything beyond small discrepancies of temporary adjustments between the supply and demand of labor mean that the labor market is reacting to incentives.

    There is only one sustainable means to increase the value that labor can demand – and that is to increase the value that labor produces.

    Again things like cheap foreign labor are gains not losses. The same (or more) value is produced at lower total cost. Systemically standard of living has risen.
    That local labor that was displaced must either move to producing greater value, or it must reduce its price.

    While prices and costs matter – they are derivative. price is only meaningful in comparision to all other prices.

    We can not know anything important by looking at the price or cost of labor alone. But we can know that if more value is produced – both in aggregate and individually standard of living will rise.

    And we find that if we look at the value produced (and consumed since the SOLE purpose or production in consumption) we find that both in the US and throughout most of the world real standards of living of people at every class have risen dramatically – in most instances doubled over the past 4 decades.

    The opposite of what the IE lunatics claim.

    • Jeff Id said

      dhlii

      I like the comment but I’m going to go ahead and disagree with you on some of your nits. First, I placed cost in the sentences where I believe cost should be, although I do agree with several of your value statements. You need to be more specific though if we are to discuss that issue.

      In the example of student loans the added subsidies in education were not on the supply side so the demand went up and we all know what that does. In the case of education, we got artificial demand for sup-par degrees which will never pan out to value creating individuals, but we absolutely got more education services. Universities have grown quite fat in education as well as administration. I’m having a hard time finding any example of a subsidy which resulted in less of a thing so while I agree the supply demand curves have two sides, I’m going to stick to my original statement that subsidies result in more of that thing.

      The second issue I have is your statement about labor. Even if my labor produced a higher value, something we strive for on a daily basis, it is very easy to find people to attempt that labor for very low wages because unskilled labor is so easy to come by. Yes the evil business could pay more (and to some extent we do in order to keep good people) but that lack of competition among unskilled labor is extremely apparent in our workforce today. For example, we put out an add to hire 12 people to start at $9/hr with free insurance about 5 years ago and received over 300 applications. Of those, only 5% could handle a 3rd grade math test with a calculator but many could do the job we hired for. We start at 9.50 today through an agency and convert after 6 months at 11.50ish. We have plenty of supply at those numbers but our paid tax level on the ‘value’ these employess produce is a huge fraction of their base income. These are actually taxes on them, which they never see. Also, foreign labor is absolutely a competitor as you state, especially in our industry. It is excess supply with only shipping and taxation to offset the labor differential.

      I do agree with most of what you say and appreciate the comment.

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