Another interesting addition to GDP is the working woman. A home-maker’s labors do not contribute to the GDP, but if she goes to work and hires someone to clean her house, then the house-cleaning contributes to GDP.

If political hacks stopped writing these stupid income tax laws, and instead raised money via a sales tax, the efforts of the accountant and tax lawyers could be put to productive use, rather than “counter-destructive” use.

Thank you.

A fee, therefore, is a usage or consumption tax. I see your point about whether or not a tax is voluntary. Calling it a fee or a tax, however, is just a matter of semantics.

I think the main problem here is that you use the terms wealth and well-being as if they measure the same things. When you speak of wealth, most people assume you are refering to economic wealth or real wealth. It makes no difference (in terms of value or contribution to GDP) WHY certain services and goods are produced.

Does the production of computer software contribute to national wealth? If people who created computer viruses, hackers, etc. didn’t exist we could probably agrre there would be no market for anti-virus software. Would I be happier buying other things with the money I currently spend on such software? Of course. Do such people impose a cost on me? Yes. Does this mean that the production of this software now contributes nothing to wealth? Absolutely not.

Unlike well-being, the measure of wealth is not a subjective one. It doesn’t matter whether or not you personally value the output produced. In fact, it doesn’t even matter whether the goods and services produced are “good” for you. Cigarettes, alcohol, pornography, tabloids, fattening food, …,(the usual suspects.) Do they enhance well-being or diminish it? Buy these goods, don’t buy them, it doesn’t matter. The production of each one is still part of GDP.

“Now, try finishing the math. The tax on a capital gain of $51 is $7.65. The tax on the same $51 at the ordinary income rate of 35% is $17.85. At 15%, the differential of $10.20 represents an increase in the basis of $68.”

The investor LOST in the transaction, because of inflation over the years he held the gold . Do you not agree? Indexing for inflation means just that. If inflation is high, the basis goes up accordingly, and one is not taxed on “gains” that are not real, but which are only the product of inflation. The worker in your example, however, has NOT lost in the transaction of selling his labor. Even so, replacing the income taxes with a sales tax would treat all income equally.

“Accountants don’t add even to the sense of well- being, huh?”

I certainly did not mean to say that, and I am sorry if I did. I meant only that their work on income taxes is artificially created by our tax code, and would be more useful elsewhere if we got rid of the ridiculous tax laws.

“[Why] not jut through (sic) out all the laws? You know, the lawyers that spend all that time trying to figure out how to keep their clients out of jail – by your definition, they add nothing to the wealth of the country.”

On the contrary. Laws in general, despite some notorious exceptions such as the recent “abusive driver fees,” provide security both personal and corporate. This increases our collective “wealth” considerably, not just in our sense of well-being, but materially as well. Lawyers provide a service in our knowing that we cannot be railroaded by a prosecutor with a grudge or an election to win. (The pittance we pay our public defenders is a disgrace.)

I do not see how the complexity of our income tax laws, and the efforts accountants and tax lawyers expend in try to abide by them, similarly benefit society.

Agreed, both taxes end up claiming income. At least a sales tax does afford the individual more control over paying. Regressivity does not especially bother me. The Linder Bill (Fair Tax) deals with that issue by means of a “prebate,” however. You are correct, that you and I are not likely to a mutually agreeable position on this issue. Let’s not even get started on Social Secutiry.

Now, please explain how the reduced capital gains tax rate on his $51 “gain” compensates for his real loss due to inflation.

First of all, I never said it compensated for all of the inflationary aspects. Secondly, you happened to have chosen to use in your example something whose value has not outpaced inflation. But I’ll play along.

Now, try finishing the math. The tax on a capital gain of $51 is $7.65. The tax on the same $51 at the ordinary income rate of 35% is $17.85. At 15%, the differential of $10.20 represents an increase in the basis of $68.

So yes, the investor is compensated.

You know, while you’re throwing out tax laws, why not jut through out all the laws? You know, the lawyers that spend all that time trying to figure out how to keep their clients out of jail – by your definition, they add nothing to the wealth of the country.

Accountants don’t add even to the sense of well- being, huh? And the “home accountants” are equivalent, huh? You have a problem, AEM, and it isn’t accountants.

You have gotten beyond tiresome, AEM. I think it’s time you find another sandbox to play in.

My point was not to denigrate accountants — every well-managed home has one, if not one that is professionally trained. My point was that the effort they expend dealing with the complexities of the tax code is NOT adding to our national wealth. In fact, their efforts detract from the national wealth, because those efforts could be put to better use elsewhere were it not for our ridiculous tax laws.

The difference between a fee and a tax is that those who pay fees are paying for the use of something. Fees are avoidable — don’t use the road or the campground. With property taxes, one cannot avoid them by saying, “I’m not going to send my children to public school, so please reduce my property taxes accordingly.”

There is some crossover, such as excise taxes. We can avoid paying them by not buying cigarettes, alcohol, and whatever else has an excise tax on it. However, they are not avoidable in the sense that selling tobacco upon which the tax has not been paid is illegal.

It produces a service. A nation’s wealth is measured by its productivite capabilities – its ability to produce goods AND services. Look at the measurement of GDP or GNP, for example. Not everything produced in an economy is tangible. Are you seriously saying that services such as accounting, financial, medical, education, etc. are not included in national output?

“I disagree with the notion that “any thing that comes out of your pocket regardless of what it is called is a tax.” …Similarly, a toll on the Jersey Turnpike is a fee to use the road, not a tax.”

That’s what a toll is…a road tax. You can call it whatever you like but GEM is correct, you may like the sound of it better but it has the same exact effect as a tax.

Explain it to me. How does the time and effort used to compute income taxes produce wealth? It may save the company money, but it does not produce anything.

“If you think that companies have in place the accounting mechanisms to handle sales tax, you are sadly mistaken.”

Then how do they pay the sales taxes the states require them to collect?

“You cannot understand that a lower rate compensates for inflation. By not taxing it at a higher rate, essentially the basis is increased. Do the math, AEM.”

Fair enough — let’s do some math:

An investor bought gold at $303 per oz. in January 1985, when the CPI was 105.5. He sold in January of 99 at $354 per oz., when the CPI was 164.3. So in constant 1983 (CPI=100) dollars, he bought the gold at $303/1.055=$287, and sold it for $354/1.643=$215.

Now, please explain how the reduced capital gains tax rate on his $51 “gain” compensates for his real loss due to inflation.

“You talk about how the sales tax means less complexity for the individual but that has nothing to do with the question, which was how does it not come from income. It comes from income just like anything else that is paid.”

No argument there. It all comes from income, so why bother with the complexity of an income tax when you can have the simplicity of a sales tax?

“About the only thing that you got right was the transfer between spouses for estate tax purposes. Such a simplistic view, though, of what estate taxes are about. What happens when she dies, AEM? Do you have any idea?”

Indeed I do. I’ve just finished dealing with that situation in my own family. The answer is that the government takes a chunk of the estate over a certain exemption. (How that is constitutional, I do not know, since the estate is not income, but wealth, and so not covered by the 16th Amendment.) The bases of all capital assets in the estate are reset to the present time.

“As for my apology – nope. Brian pointed out that the data I referred to covered the 2000-2005 change. Had you said that, I would have changed what was obviously a typo.”

No surprise there. In any event, 2005 average income seems to be the second highest in history. My expectation is that we have already passed the mark set in 2000.

Vivian, would you also please also explain how a sales tax is regressive, especially if one is, as per the proposals, NOT paying sales taxes on the first X dollars (let’s say $5000, since the 4-person-family poverty level is about $20,000) of purchases.

GEM, you are correct. I had no idea that Gates had children. When they grow up, let’s ask them if they want the government to take half of their inheritance when their father dies. (If they say, “yes,” we can still eliminate the tax, and they can contribute the money to the government voluntarily.)

I disagree with the notion that “any thing that comes out of your pocket regardless of what it is called is a tax.” When I go to a National Park and pay a fee to camp, it is a fee, not a tax. Similarly, a toll on the Jersey Turnpike is a fee to use the road, not a tax.

I don’t disagree that the size of government needs to be reduced. But even if we did that, the entitlement programs, of which Social Security is the largest, will continue to cost more money. We discussed this earlier.

Two answers:

First, if we are going to assume that the government (federal for the sake of simplicity) must be funded at the rate is now, then yes I would prefer a national retail sales tax. I do not understand why the feds should automatically have a claim on my income. I further don’t see why they should even know how much I make. I hope that demonstrates why a sales tax is fundamentally different from an income tax.

Second, I would prefer to see a far smaller and less robust federal government. I’d like to be rid of half or more of the cabinet departments and wast swathes of the federal bureaucracy. We will unfortunately never be able to go back 100+ years in terms of the size of government – the world has changed too much. But we could do with much less of the legacy of Wilson/FDR/LBJ/Bush43.

I suppose that the tax issue is more than simply a financial/monetary concern to me.

If you don’t think that doing taxes doesn’t create wealth, you don’t understand what it entails. If you think that companies have in place the accounting mechanisms to handle sales tax, you are sadly mistaken. Again, you are looking through your own lens and not that of the greater whole.

You cannot understand that a lower rate compensates for inflation. By not taxing it at a higher rate, essentially the basis is increased. Do the math, AEM.

You talk about how the sales tax means less complexity for the individual but that has nothing to do with the question, which was how does it not come from income. It comes from income just like anything else that is paid.

About the only thing that you got right was the transfer between spouses for estate tax purposes. Such a simplistic view, though, of what estate taxes are about. What happens when she dies, AEM? Do you have any idea?

As for my apology – nope. Brian pointed out that the data I referred to covered the 2000-2005 change. Had you said that, I would have changed what was obviously a typo.

Brian – the question is why is it an issue at all with people who will never be subject to it? All of the energy in wasted on the estate tax – principle or not – would be better utilized on getting the tax burden reduced on the shrinking middle class. The fat cats have duped Middle America into taking up their cause, while ignoring their own.

Which is what I started with in this article. Two thirds of Americans make less than $50,000. Why are we talking about estate taxes at all? I venture to say that not a single one of those 2/3 will have a taxable estate.

OK. No problem. However, the only way most individuals could be earning more while the average is decreasing is if there are outliers skewing the data. That is, there must have been either an increase in very low income earners dragging down the average or a reduction in incomes earned at the very top. Getting back to Vivian’s original post that during this time there was a 26% INCREASE in the number of taxpayers in the top .25% of income earners, it would seem more likely that the income of most working individuals has gone DOWN.

See, that’s the problem. Tax cuts just cut taxes. They don’t cut spending. The unholy compromise that’s been reached in the last few years has been to cut taxes, but not cut spending. See, for example, the war in Iraq. Yes, I know, and many, many other things.

Ah, I’m sorry if I miswrote — I did not intend to say that at all. I was trying to get across that, while the average in 2005 was lower than in 2000, the income of most working individuals has probably gone up.

To my analogy, MOST trees in the forest will be growing, but the oldest, the tallest, will be dying off and falling down. Similarly, the oldest workers (those in their peak earning years) are retiring.

I was responding to your claim that part of the decrease in average income between 2000 and 2002 was due to new entrants replacing retirees in the labor force. My reply still stands – this happens every year and yet we do not see a decrease in average income every year. Therefore, that is not a plausible explanation. While it is generally true that individuals’ earnings increase over their lifetimes, it does not necessarily follow that all new entrants in the labor force earn less money than individuals in “their peak earning years.”

Back to your analogy – if the trees in the forest grow, the average height of the trees MUST be rising. It is not mathematically possible for the trees to grow without the average height rising.

As far as capital gains, when it is as high as the income tax rate, the economy doesn’t exactly crank along too well. The government likes it when there are few disincentives to investment.

And your point about “revenue neutral,” your right. But those who want tax cuts that actually cut government spending are vastly outnumbered by those who want to increase it.

“The capital gains rate is a maximum of 15% (in most cases), while the personal income tax rate is 35% (in most cases). So essentially by the rate being significantly lower, it has taken into account the effect of inflation, among other things.”

That does not answer the question, which was, “Please explain how the preferred tax rate makes the cost basis indexed for inflation. “

“How do you think wealth is created, but for labor?”

When did I say wealth was created by labor? Some labor, though, such as that of accountants’ doing taxes, does NOT create wealth. However, it is not just the labor of people that creates wealth. The labor of machines does also. Those who designed and invented the machines, and those who take the financial risk of buying those machines, reap the profit from their increased production. If they did not, there would be no incentive to take the financial risk of buying the machines. The owners of a company, and those who buy its bonds, have taken a financial risk. If there were no reward, they would not take the risk. That is the essence of capitalism.

“Oh and about the sales tax- do you think that there is no accounting associated with it? Tell that to the companies that program the registers, or the accounts who prepare the sales tax returns. Heck yeah there is accounting associated with it. Just because you don’t see it on your end doesn’t mean it doesn’t occur.”

Is the accounting required for a sales taxes anywhere close to that required to do income taxes? Most companies already have that accounting in place. Only companies that operate only in states without sales tax do not. The addition of a federal sales tax would increase that accounting only minimally. The elimination of corporate income taxes would save a lot of time and money. What accounting and bookkeeping requirements are required of individuals to pay sales taxes?

“Besides, I noticed that you didn’t answer the question: how does the sales tax not come from your income?”

My apologies for the oversight. Purchases certainly are made from income of one sort or another. Thus, a sales tax would tax income, as you desire. However, it would do so without the ridiculous complexity of our income tax system. Additionally, all forms of income — labor, capital, interest, inheritance — would get equal treatment. Under the proposd plans, everyone would get a check from the government covering taxes on the first X dollars of purchases, making the tax progressive. So what’s the problem (besides the risk to your business)?

Now, explain to me how Bill Gates will be affected by an estate tax? First, he will be dead. Second, he has no children. Third, a transfer to his wife is tax-free anyway.

Have I missed any other questions?

Tell me a tax that could be lowered, especially when the capital gains rate is already 20 points below the income tax, taxed at the lowest it has ever been. And they certainly didn’t make the elimination of the estate tax revenue neutral, now did they?

GEM said it above: the crazy rich, like Gates & Buffet, are the ones who would be affected by this and they are saying that the estate tax should not be eliminated. Why are poor folks, who won’t have an estate problem, anyway, worried about this and in favor of doing away with it?

I don’t get it.

And you didn’t answer the question, either.

Vivian, all I was saying is that if all your interested is taxing estates because of fairness, why not make it revenue neutral by lowering other taxes? Otherwise it looks like an insatiable grab for more money.

Heck yeah there is accounting associated with it. Just because you don’t see it on your end doesn’t mean it doesn’t occur.

Besides, I noticed that you didn’t answer the question: how does the sales tax not come from your income?

The capital gains rate is a maximum of 15% (in most cases), while the personal income tax rate is 35% (in most cases). So essentially by the rate being significantly lower, it has taken into account the effect of inflation, among other things.

No, because individual incomes are rising, just as the trees in the forest grow, but the average height of the trees does not increase.

Vivian, as far as their labor in the calculation of taxes goes, that labor of absolutely nothing to our national wealth, and is, in fact, a drain upon it, because that labor could be used profitably elsewhere.

Also, Vivian, please explain how the preferred tax rate makes the cost basis indexed for inflation. I do not understand.

What recordkeeping nightmares accompany a sales tax? What intrusive questions must be answered? What ridiculous rules, regulations, forms, and instructions are needed for a citizen to comply? With a sales tax, can a citizen be penalized for following directions given to him by an IRS employee, if that employee gives him bad directions?

I think it you piled up all the sales tax laws from all the States in the Union, the pile would be smaller than the federal income tax law.

You already have your indexing of gains for inflation: it’s called the preferred tax rate for capital gains.

Brian and Brian – tell me how you are going to pay for government services? Or would you just prefer we not have any of them – no roads, no schools, no police or fire?

And don’t give me the sales tax argument. Because sales taxes are the same thing. Where do you think the money comes from if not from income?

It makes me like doing away with income taxes altogether.

This happens every year. By your logic average incomes would drop each and every year.

From your earlier post: “Also, we are not talking about “giving,” but about taking. It is not even taking BACK, because the rich did not get their money from the government in the first place.”

Really? Rich people don’t receive money from the government? I guess we’re not including any corporate welfare policies.

Who’s falling behind? Falling behind whom?

First of all, as the article indicates, the average income dropped between 2000 and 2002. It was, after all, a recession. The average income has been going up, adjusted for inflation, since then. Furthermore, the IRS data are not tracking individuals. While the average may have gone down, the people have changed. The older ones (who tend to be in their peak earning years) have retired, and young workers and “unlawful aliens” have come in.

If the average height of the trees in a forest has not changed for five years, do you conclude that the individual trees are not growing?

Agreed, if you are willing to index the gains for inflation! The proposal also has the merit that the heirs are not forced to sell to pay the taxes.

Now, since capital gains are an accounting nightmare, and the labor of the accountants adds nothing to the national wealth, why don’t we just eliminate the capital gains tax altogether?

Yes, but there is also plenty of evidence that such income mobility has significantly decreased over the past 10 years.

“Many who are in the poorest 10% rise to middle class.”

Actually. No. There is very little mobility for the bottom 10% and the top 10% of income earners in the U.S.

The only injustice here is that rich folks want to get off scot free, never paying any taxes on their profits, while the rest of us have to.

Lumen – the problem with the tradeoff (which, by the way, has been proposed in the past and rejected) is trying to establish the original basis. We run into that problem all the time with gifts: grandma bought 100 shares of AT&T in 1950 and due to mergers, acquisitions and spinoffs, she now has various shares of 7 or 8 different companies. So she splits it up among her 10 grandchildren. Grandma dies, the grandkids decide to sell, and no one knows how much Grandma paid for the original shares back in 1950 or whether she sold some, etc.

It’s an accounting nightmare. And remember, the onus is on the seller to prove basis; otherwise, it is presumed by the gov’t to be zero.

Nice, right?

Who can say? Some folks are always falling behind while others are getting ahead. The real question is: what right do government bureaucrats have to decide who is far enough ahead and who is too far behind, without regard to the choices each have taken to put themselves in that position?

As for the argument that it is only a few people… “Injustice anywhere is a threat to justice everywhere”.

It is, on the face of it, unjust to tax the wealth earned over a lifetime at the moment it passes to heirs. It was already taxed once. Your own argument about thresholds (It probably should be somewhere between $3million and $5million) demonstrates that you don’t want this for some heirs, only for wealthy heirs. That makes it a punishment, targeted at people you don’t like, or at least have no empathy with. If you want it “fair” then apply it to everyone. Otherwise you are simply using the power of the state to bring others low.

I understand that there are lots of people who enjoy watching other people punished, but it should never be the policy of our government to pander to such people.

I can certainly understand how people who are not rich and do not expect to become rich might still recognize the inherent injustice of a tax exclusively against the rich, in all its forms, and would seek to end that injustice. It doesn’t take an economist to understand psychology.

That’s a nice story with a happy ending, but it begs the question why those folks saw a measurable decrease in their average income, doesn’t it? A fundamental part of our American identity is the belief that if you work hard, you’ll get ahead. Why are folks falling behind?

As far as the original post, is it possible that with an aging population there are more people either retiring or moving into part-time work/partial retirement? Or could people staying in school for more years lower average annual incomes? Could those lifestyle changes cause the average income to go down, while not actually indicating lowering standards of living or wealth? I’m not sure, but it’s just a few possible explanations, without further details on what the statistics are really showing.

The communications satellites are mostly private.

“The progressive tax system, also long a fixture of America…”

The 16th Amendment was ratified in 1913. We have had federal income taxes for less than 100 years. I am happy to say that not only did Virginia not ratify this abomination, we never even considered it. I do not know when Virginia itself started an income tax.

“Those who use the public goods the most and have benefited the most should give more back to it.”

How does a rich man’s vehicle need more road than that of a poor man? Are there more police patrolling the rich neighborhoods, or the poor ones? Is a rich man’s house more likely to burn down? Which will have his house properly insured — the rich man or the poor man? Granted, the rich are more likely to use libraries, but they are less likely to use public schools.

Also, we are not talking about “giving,” but about taking. It is not even taking BACK, because the rich did not get their money from the government in the first place.

My definition of “fair” is getting what you pay for.

“[It] all comes down to this notion of using the common wealth for the common good.”

That’s just it — a man’s wealth is his, not the governments’. It is not “common.” (Also, we’re not talking about a wealth tax, but an income tax.)

“The reason we have such shocking economic disparity and third world conditions in the richest country in the world is because of conservatism, plain and simple.”

The first is quite correct. Our economic disparities ARE the result of conservatism. Those who have contributed the most (by creating jobs and by offering better products for equivalent prices or equivalent products for better prices) have been rewarded the most. When a farm owner spends his money to buy a better combine, should he pay his combine driver more? No — the farmer has taken the financial risk, and should reap the reward. That is the system that has allowed us to be the nation we are, and we are the richest in the world because of it.

Tell me, in what nations is the major health problem of the poor OBESITY?!

The inheritence tax is the only one that specifically taxes only people who are wealthy, in terms of accumulating a lifetime of earnings, all of which were already taxed.

And this is the biggest lie in the argument about estate taxes. The principal amount has already been taxed, but not the earnings.

When you buy a stock and sell it, you pay tax on the gain. When someone dies, the gain HAS NOT been taxed. That is what the estate tax attempts to capture. The same tax on gains that everyone else pays.

And then there is the stepped-up basis. The beneficiary get as his investment in the stock the value on the decedent’s date of death (or alternative valuation date).

I have absolutely no problem with an increase in the amount of an estate that is exempt from the tax or even indexing that amount. (It probably should be somewhere between $3million and $5million.) But to do away with it completely puts one group of people (and a very small one, at that) at a distinct advantage over the rest of us.

$280 million is what it is projected to cost VA over the next biennium due to the early elimination of the estate tax.

I say if you want to eliminate the estate tax, the tradeoff has to be that when the stuff passes to the heirs, let the basis pass to them, too, just like it does when they make a gift. At least that way, we have a chance of them paying taxes on the gains.

That riding a donkey with a carrot tied to a string in front of it has worked for a good long while, now.

Funny – I use this analogy all the time. I even have a picture of a carrot hanging from a string up on my wall.

Actually, I think it is the libertarians who want to destroy the progressive income tax. Republican politicians benefit every bit as much from the current system as Democrats.

Those who use the public goods the most and have benefited the most should give more back to it.

This is where we fall away from each other. You assume that a successful wealthy person is that way because he benefits more from public services than poorer Americans. You really have to twist reality to come to that conclusion. The man in the penthouse and the guy in the lower floors of the same building benefit the same from the fire department showing up. Likewise, when the police arrest a criminal, every future potential victim benefits alike from the criminal not harming them. If anything, one might argue, using the same “progressive” tax argument, that the poor benefit even more, since they are more likely to be victims of crime and they can least afford the financial losses arising from property crimes. So should they be taxed higher to pay for those services?

There are lots of different taxes in the USA. Some like the gasoline tax, do a really good job of associating those who benefit (drivers)with those who pay (people who buy gasoline). The inheritence tax is the only one that specifically taxes only people who are wealthy, in terms of accumulating a lifetime of earnings, all of which were already taxed. It is a punishment, born of greed. It is inherently un”fair”. It encourages wasteful spending in the later years of life. It encourages hiding the wealth in shelters and foundations. It encourages wealth to go offshore to hide it from the grasping hands of government.

The fact is, it isn’t yours. You do not have a right to other people’s money. Getting a law passed does not make theft right. The deceased have already paid their taxes, all their lives. How they dispose of thier assets after death is none of your business.

If your logic is so good, then why not propose a 95% tax on lottery winnings? After all, that would affect even fewer people, and they did even less to earn it. Think of all the poor people you could help with that.

Taxes are what was used to build the entire infrastructure that you enjoy today. Do you think bridges build (or fix) themselves? How do you think those satellites that connect so much of our lives got up there? Libraries, schools, fire departments, police, military, all funded by your tax money. We use the common wealth of the people for the common good. Sorry, but that’s the system, and that’s why our nation is (was) so strong.

The progressive tax system, also long a fixture of America and which Republicans now wish to destroy, rests on a pretty simple premise. Those who use the public goods the most and have benefited the most should give more back to it. That’s called “fairness.”

You can keep trying to cloud the debate with nonsense about “punishment” or whatever is the talking point this week, but it all comes down to this notion of using the common wealth for the common good. The reason we have such shocking economic disparity and third world conditions in the richest country in the world is because of conservatism, plain and simple.

I understand believing in the American Dream: work hard, get ahead. I think that for many, though, the American Dream is not their reality.