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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 756346  
Subject: Optimal Tax Policy Date: 10/16/2012 6:27 AM
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Optimal Tax Policy

"A group of top economists was asked what they thought about this statement:

"Taxing capital income at a permanently lower rate than labor income would result in higher average long-term prosperity, relative to an alternative that generated the same amount of tax revenue by permanently taxing capital and labor income at equal rates instead."

There was not unanimity, but about three times as many economists agreed than disagreed."

http://gregmankiw.blogspot.com/2012/10/optimal-tax-policy.ht...

It's too bad that so many people are more interested in "fairness" than prosperity.

“Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness.”
- Barack Obama
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Author: AOLFoolman100 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 649037 of 756346
Subject: Re: Optimal Tax Policy Date: 10/16/2012 7:45 AM
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"Taxing capital income at a permanently lower rate than labor income would result in higher average long-term prosperity, relative to an alternative that generated the same amount of tax revenue by permanently taxing capital and labor income at equal rates instead."


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This makes sense. Why? Because the participation in investing and capital risk taking is far more sensitive to tax rates affecting returns than tax rates affecting participation in labour. People have to work for a source of stable income (most of the population at least). On the other hand, investing is far more discretionary and more affected by perceived risks and rewards, of which the tax rate is a significant factor.

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Author: twopairfullhouse Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 649072 of 756346
Subject: Re: Optimal Tax Policy Date: 10/16/2012 11:46 AM
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In my mind, Optimal Tax Policy is what results in the largest overall amount of taxes going to the Government over the long term. That sounds counterintuitive, if not blasphemous, to tax hawks, but think about it. Lower rates increase tax revenue, but only to a point. If the Government were to simplify taxes and lower the rates, they would receive as much or more as they do now. If the Government were to look at the long term, they would be motivated to keep tax rates as low as possible, while still paying off debt as quickly as possible.

I don't think we need to worry about the situation about paying off our debt too quickly such that we would need to lower rates beyond the tax maximization point, at least in the short term.

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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 649078 of 756346
Subject: Re: Optimal Tax Policy Date: 10/16/2012 12:25 PM
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In my mind, Optimal Tax Policy is what results in the largest overall amount of taxes going to the Government over the long term. That sounds counterintuitive, if not blasphemous, to tax hawks, but think about it. Lower rates increase tax revenue, but only to a point. If the Government were to simplify taxes and lower the rates, they would receive as much or more as they do now. If the Government were to look at the long term, they would be motivated to keep tax rates as low as possible, while still paying off debt as quickly as possible.

I don't think we need to worry about the situation about paying off our debt too quickly such that we would need to lower rates beyond the tax maximization point, at least in the short term.


I disagree. I don't think maximizing the size of government (which is what we are really talking about) in the short run OR long run is optimal. I think the optimal level of taxation is *far* below long-run tax revenue maximization.

The optimal tax policy raises the absolute minimum amount of tax revenue necessary to fund government functions to protect our individual rights, and it does so with a minimal amount of economic distortion. In other words, tax consideration of potential courses of action is minimized.

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Author: twopairfullhouse Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 649092 of 756346
Subject: Re: Optimal Tax Policy Date: 10/16/2012 1:25 PM
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The optimal tax policy raises the absolute minimum amount of tax revenue necessary to fund government functions to protect our individual rights, and it does so with a minimal amount of economic distortion. In other words, tax consideration of potential courses of action is minimized.

But over the long term, your statement and mine are the same, or at least reach the same numbers. An optimal tax policy realizes that any taxes more than absolutely necessary lower economic growth, and therefore lower long run tax receipts.

The problem is that Democrats don't understand either of us, except that we must be racist.

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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 649103 of 756346
Subject: Re: Optimal Tax Policy Date: 10/16/2012 2:38 PM
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The optimal tax policy raises the absolute minimum amount of tax revenue necessary to fund government functions to protect our individual rights, and it does so with a minimal amount of economic distortion. In other words, tax consideration of potential courses of action is minimized.

But over the long term, your statement and mine are the same, or at least reach the same numbers. An optimal tax policy realizes that any taxes more than absolutely necessary lower economic growth, and therefore lower long run tax receipts.


I seriously doubt that it would be true. The farther you decrease the tax levels, the less benefit to economic growth that you get from decreasing rates further. I suppose in terms of future value you could be correct, but I doubt that the present value of the future tax revenue stream would be maximized with the optimal tax policy as I laid out above.

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Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 649179 of 756346
Subject: Re: Optimal Tax Policy Date: 10/16/2012 10:47 PM
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In my mind, Optimal Tax Policy is what results in the largest overall amount of taxes going to the Government over the long term. That sounds counterintuitive, if not blasphemous, to tax hawks, but think about it. Lower rates increase tax revenue, but only to a point.

I half agree. The optimal tax policy has an overall tax structure matching what you describe, but with rates *no higher* than that.

However, if a lesser amount of tax revenue is sufficient to fund the necessary and proper function of government, that lesser amount of tax revenue should be achieved by setting tax rates *lower* than the point which maximizes long-term revenue.

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Author: AdvocatusDiaboli Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 649186 of 756346
Subject: Re: Optimal Tax Policy Date: 10/17/2012 12:51 AM
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"A group of top economists was asked what they thought about this statement:

I'd like to point out that the very same group of economists was asked about whether the Obama stimulus lead to higher economic growth, the overwhelming majority of them said yes. Some were undecided. You may remember that post, I've been unable to find it.
I think your answer was something along the lines of "those economists are all idiots".

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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 649190 of 756346
Subject: Re: Optimal Tax Policy Date: 10/17/2012 6:33 AM
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"A group of top economists was asked what they thought about this statement:

I'd like to point out that the very same group of economists was asked about whether the Obama stimulus lead to higher economic growth, the overwhelming majority of them said yes. Some were undecided. You may remember that post, I've been unable to find it.
I think your answer was something along the lines of "those economists are all idiots".


Yes, they are idiots. However, economists tend to be very liberal, so it is an interesting opinion that so many of them believe that capital should be taxed lower than income.

It actually is supported by tons of research that taxes on capital are very destructive to economic growth.

It blows my mind that the whole idea that the stimulus created jobs was based on the assumption that the stimulus was stimulative and therefore created jobs. It's not good science.

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Author: AdvocatusDiaboli Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 649194 of 756346
Subject: Re: Optimal Tax Policy Date: 10/17/2012 7:42 AM
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However, economists tend to be very liberal,

They what? Well, I guess that just depends where the observer stands.


It actually is supported by tons of research that taxes on capital are very destructive to economic growth.

I absolutely agree with the economists. I don't think, however, that that means that taxing capital not at all is a good idea. If you don't have any taxes on capital but significant taxes on income, there's tremendous pressure to structure all economic activities in a way that makes it possible to relabel all "income" into "capital gains". That is very distortive.

It blows my mind that the whole idea that the stimulus created jobs was based on the assumption that the stimulus was stimulative and therefore created jobs.

The idea is that the stimulus caused an increase in aggregate demand. Why wouldn't that create jobs? Or save jobs, for that matter.

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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 649195 of 756346
Subject: Re: Optimal Tax Policy Date: 10/17/2012 8:07 AM
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However, economists tend to be very liberal,

They what? Well, I guess that just depends where the observer stands.


It's based on surveys. I suppose they could be lying, but I doubt it.

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Author: AdvocatusDiaboli Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 649196 of 756346
Subject: Re: Optimal Tax Policy Date: 10/17/2012 8:12 AM
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It's based on surveys. I suppose they could be lying, but I doubt it.

I'd be extremely interested to see one of those. You don't happen to have any handy?

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Author: MadCapitalist Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 649198 of 756346
Subject: Re: Optimal Tax Policy Date: 10/17/2012 8:17 AM
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It blows my mind that the whole idea that the stimulus created jobs was based on the assumption that the stimulus was stimulative and therefore created jobs.

The idea is that the stimulus caused an increase in aggregate demand. Why wouldn't that create jobs? Or save jobs, for that matter.


This belief is caused by an elementary error. It was *assumed* that the stimulus caused an increase in aggregate demand. They *assumed* that the stimulus had a multiplier greater than 1 and then they plugged their *predetermined* multiplier into their models. Then they calculated how many jobs were supposedly "saved" by the additional aggregate demand. It didn't matter what the actual results of the stimulus were since the "results" were essentially predetermined by the multiplier.

For what it's worth, I think that the reason that Keynesian policies invariably fail is because it ignores a very important point by Bastiat. Keynesian economists look at the seen and ignore the unseen.

What Is Seen and What Is Not Seen

"In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

1.2
There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

1.3
Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil."

http://www.econlib.org/library/Bastiat/basEss1.html

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Author: JLC Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 649213 of 756346
Subject: Re: Optimal Tax Policy Date: 10/17/2012 10:36 AM
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People have to work for a source of stable income (most of the population at least). On the other hand, investing is far more discretionary and more affected by perceived risks and rewards, of which the tax rate is a significant factor.

Plus, the money that I'm investing I've already labored for and its already been taxed once.

JLC

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