No. of Recommendations: 24
Taxes Are Much Higher Than You Think

"Taking into account all taxes on earnings and consumer spending—including federal, state and local income taxes, Social Security and Medicare payroll taxes, excise taxes, and state and local sales taxes—Edward Prescott has shown (especially in the Quarterly Review of the Federal Reserve Bank of Minneapolis, 2004) that the U.S. average marginal effective tax rate is around 40%. This means that if the average worker earns $100 from additional output, he will be able to consume only an additional $60.

Research by others (including Lee Ohanian, Andrea Raffo and Richard Rogerson in the Journal of Monetary Economics, 2008, and Edward Prescott in the American Economic Review, 2002) indicates that raising tax rates further will significantly reduce U.S. economic activity and by implication will increase tax revenues only a little.

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In the 1950s, when European tax rates were low, many Western Europeans, including the French and the Germans, worked more hours per capita than did Americans. Over time, tax rates that affect earnings and consumption rose substantially in much of Western Europe. Over the decades, these have accounted for much of the nearly 30% decline in work hours in several European countries—to 1,000 hours per adult per year today from around 1,400 in the 1950s.

Changes in tax rates are also important in accounting for the increase in the number of hours worked in the Netherlands in the late 1980s, following the enactment of lower marginal income-tax rates.

In Japan, the tax rate on earnings and consumption is about the same as it is in the U.S., and the average Japanese worker in 2007 (the last nonrecession year) worked 1,363 hours—or about the same as the 1,336 worked by the average American.

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Entrepreneurship is much lower in Europe, suggesting that high tax rates and poorly designed regulation discourage new business creation. The Economist reports that between 1976 and 2007 only one continental European startup, Norway's Renewable Energy Corporation, achieved a level of success comparable to that of Microsoft, Apple and other U.S. giants making the Financial Times Index of the world's 500 largest companies."

http://online.wsj.com/article/SB1000142412788732446930457814...


That's weird. It's almost as if high taxes reduce the incentive to work and start businesses.
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Gee, it doesn't take a genius to realize that there comes a point where people begin to realize that free time is worth more than what they get to keep from working more hours, particularly when so many of the necessaries and unnecessaries of life are gifted to them by the government.
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Gee, it doesn't take a genius to realize that there comes a point where people begin to realize that free time is worth more than what they get to keep from working more hours, particularly when so many of the necessaries and unnecessaries of life are gifted to them by the government.
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We have had waves of immigrants that support this. Cubans and Russians, Czechs etc with advanced educations working as cabbies etc is not urban legend in the history of the last 50 years, as an extreme example

I know many moons age, when I was working many hours and was single, I remember seeing in the area of 50 cents on the dollar after deductions and actively trying to avoid overtime.
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"Gee, it doesn't take a genius to realize that there comes a point where people begin to realize that free time is worth more than what they get to keep from working more hours, particularly when so many of the necessaries and unnecessaries of life are gifted to them by the government." - ResNullius
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What is amazing is that in this country you can work just a year or two and have all the things you need to have a good life, like a Television, phone, CD player, kitchen supplies, clothes, washing machine, etc. It really is different than a lot of countries where you might have to work ten years to afford a washing machine or a television.

I had a friend, Claudio Bandea, who escaped from Romania back when it was a communist country (while it was still under Ceaucescu) and walked through Yugoslavia, through the Alps, into Italy where he was put in a relocation camp. At first he lived in Atlanta, Georgia with a Romanian man who owned a car repair business in Atlanta, Georgia and then he came to the University of Georgia and got a job working in a lab in the horticulture department as a lab technician. He got his own apartment and bought an old used Fiat (that he used to work on all the time) and bought a television, phone, stereo, etc. Claudio was amazed and said, "in one year you can have 'all things' in this country." He met a girl there and got married and now I think he lives and works in northeast Atlanta, Georgia doing something with plant genetics.

My wife and her brother go out "yard saling" every weekend and she drags home all kinds of expensive stuff that she just pays a few dollars for. I got all kinds of expensive knives and stainless steel cookware that my wife only paid a couple of dollars a piece for. A few Saturdays ago she brought home 4 pocket knives that she paid $1.00/each for that I figured up the total retail value new would have been over $70.00. A Smith & Wesson knife, a Gerber knife, a really nice lockblade knife with 440 stainless steel, and a multi tool (real) Swiss Army Knife. The Swiss Army knife alone was like a $37.00 knife if you bought it new.

Art
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"We have had waves of immigrants that support this. Cubans and Russians, Czechs etc with advanced educations working as cabbies etc is not urban legend in the history of the last 50 years, as an extreme example. I know many moons age, when I was working many hours and was single, I remember seeing in the area of 50 cents on the dollar after deductions and actively trying to avoid overtime." - lowstudent
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People figure out other ways of making cash money that they can stick in their pocket. My friend that used to own the meat business told me a lot of foreign Arabic types like to start Pizza places because it's all cash and they can just stuff the money in their pockets with no paper trail. The whole family works in the business and in just a couple of years they become millionaires.

Same thing with Indians that buy hotels and motels. They do everything themselves and any rooms they rent for cash gets put away and hidden.

My friend used to have a guy who plowed snow from his lot and he got like $75.00 each time, all cash.

People learn how to skin the rabbit. Yard sales, etc. Some guys around here got garages in back of their houses that they work on cars. I had friends that bought and sold horses, cars, trucks, guns, hunting dogs, etc. One friend used to keep a big roll of hundred dollar bills rolled up in his pocket. It was held together with a big rubber band!

Art
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No way man! High taxes make people more patriotic and they work HARDER! I can't give a rational explanation of why this happens but in the 50's there were really high tax rates and, like, the economy boomed! So clearly it was high tax rates that made the economy boom and it wasn't the government raising tax rates to capture more of the booming economy while offering oodles of deductions so that nobody actually paid the highest rates. No way that happened. And there wasn't a major war that decimated the manufacturing capacity of the rest of the developed world while leaving ours virtually untouched in the 40's. Nope, couldn't possibly have happened. It was all high taxes and unions!

/Man, even pretending to be liberal gives me a headache, what with having to deny the obvious and support contradictory things!
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That's weird. It's almost as if high taxes reduce the incentive to work and start businesses.

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I would say it depends on the facts and circumstances. What the tax code does for sure is introduce distortions in the market, and often it is unintended distortions.

Take my DW, for example. A decade ago she quit full time work. We had moved to the burbs and were planning to start a family. DW has two master's degrees from a top shelf university and is highly employable, but I earned more and all her income was effectovely at a high marginal tax rate. So what did she do? Chiefly she chases the kids, but she started a sole proprietorship as well. This allowed her to keep her skills sharp and have some adult contact. It is also highly favored by the tax code. We pass on a variety of potential deductions (home office, etc.) because they are audit flags and could potentially be disallowed according to the letter of the law. Instead, we just use a solo 401k to shelter all of her net income. She pays the self employment taxes and ducks all of the federal and state income taxes without a fuss. So long as she does not earn more than she can shelter (about 23.5k next year), the income will be extremely lightly taxed. Would she so limit herself if the tax code were otherwise? Hard to say, but there would certainly be an incentive to make more if her effective tax rate did not go from 15% to close to 50% once she crossed a seemingly arbitrary income level. OTOH, you could argue that this quirk of the tax code was a strong incentive for her to start her business.

Regardless of where tax rates fall, I think this is a strong case for simplification of the tax code.
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No way man! High taxes make people more patriotic and they work HARDER!

I've actually read arguments by liberals that high taxes make people work harder since they have to earn more income to get the same after-tax income.

Just think how hard people would work if we jacked up the tax rate to 99.9%! Our economy would boom!
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In the 1950s, when European tax rates were low, many Western Europeans, including the French and the Germans, worked more hours per capita than did Americans. Over time, tax rates that affect earnings and consumption rose substantially in much of Western Europe. Over the decades, these have accounted for much of the nearly 30% decline in work hours in several European countries—to 1,000 hours per adult per year today from around 1,400 in the 1950s.

Fine. So limit the change to only an increase in long term capital gains.

-spookysquid
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In the 1950s, when European tax rates were low, many Western Europeans, including the French and the Germans, worked more hours per capita than did Americans. Over time, tax rates that affect earnings and consumption rose substantially in much of Western Europe. Over the decades, these have accounted for much of the nearly 30% decline in work hours in several European countries—to 1,000 hours per adult per year today from around 1,400 in the 1950s.

Fine. So limit the change to only an increase in long term capital gains.

-spookysquid


It figures that you would pick one of the most economically harmful taxes to increase.
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It figures that you would pick one of the most economically harmful taxes to increase.

Link? Support? Something? Besides, I'm pretty sure that's the corporate taxes that have the most impact to growth, not the rate most relevant to the top earners. Therefore your criticism as "the" most economically harmful, I think, is not accurate. But fighting over "not the worst" is hardly a strong position on my part, I admit. :)

But didn't the CRS just debunk this? The strongest criticism of the CRS report was that it doesn't fully look at the top rate's impact to corporate income taxes. Doesn't focusing on long term capital gains bypass that criticism as well?

http://democrats.waysandmeans.house.gov/sites/democrats.ways...

Last, and this could just be severe ignorance on my part (I'm fully prepared for this eventuality), but the numbers I've seen say things like "A 1% reduction in tax type X leads to an increase in GDP of 1.4%" or something along those lines. But who cares? If I collect 10% tax on $100 of GDP for a total of $10 in revenue, if I drop my rate by 1% and thus increase to $101.80, then I now collect $9.16. I don't get back to my old level of revenue until growth gets to $111.11, which would take about 6 years, assuming nothing else changes. How does that increase my tax revenue now?

I guess all of this comes down to what problem you are trying to solve with your tax structure. Balance of power (through growing concentrations of capital), relief for the poor (tax credits and what not), or least impact to growth. The answers (proposed tax structures) in large part are reflections of the question, yet everyone assumes the other's failure to address their preferred question means that they are "evil". That's certainly not constructive either.

-spookysquid
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