Transterrestrial Musings

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Nothing about tort reform, however.

Thompson is a trial lawyer, and opposed tort reform when he was a senator.

If you care about this issue -- and I do -- it's a deal killer. Why, exactly, is Thompson supporting the interests of the trial lawyers, the robber barons of the modern world, and the sugar daddies of the Democratic Party? Why?

Posted by Slithy Tove at November 15, 2007 08:08 PM

Then you agree with Hillary Clinton about one thing. Both of you want Fred Thompson to win the Republican nomination. And both of you will be disappointed.

Posted by Jim Harris at November 15, 2007 09:36 PM

Yes, because Jim will win it! With Jim as the GOP nom, Hillary doesn't stand a chance!

Posted by Anymouse at November 15, 2007 09:52 PM

Yeah, I had the perfect plan to beat Hillary. But now I'm in trouble, because she stole my manuscript.

She also swapped Thompson's Geritol pills for Valium. But that was a mistake --- she should have waited until after the primary.

Posted by Jim Harris at November 15, 2007 10:17 PM

"Tort reform"... there's the number 1 issue in voters minds. Here is a link, Rand. If you wish, here is the topic as it was discussed the last time Kudlow and Thompson talked: http://fredthompson2008-blogger.blog$pot.com/2007/06/fred-thompson-on-cnbc-tort-reform.html

Posted by Leland at November 16, 2007 06:12 AM

I watched the interview and agree that Thompson sounded very good over all. Kudlow's NR piece glosses over Thompson's reluctance to give a straight answer on the farm bill. And it's true that Kudlow avoided the two issues, tort reform and McCain-Feingold, on which Thompson is IMO weakest. But these are quibbles when you consider that all of the candidates are at least as weak on some important issues. Thompson seems to be a thoughtful and intelligent person with a generally sound world view and some humility. I noticed that Kudlow's liberal commenter Michael Metz, who disagreed with Thompson on tax reform and other important issues, nonetheless had a favorable impression of Thompson. Thompson reminds me of Dick Cheney before Cheney was demonized by the Left. It would be nice if someone like Thompson could be elected president but I'm not holding my breath.

Posted by Jonathan at November 16, 2007 06:45 AM

a generally sound world view

It seems that a "generally sound world view" includes major talking points that are false. One of his positions as listed by Kudlow is that "the top 5 percent pay 60 percent of all tax collections now." But it's not true. The top 5 percent pay about 60 percent of federal income taxes, not all taxes. It's just bad mathematics to take one particular tax and call it all taxes. In 2004, top 5 percent paid 40% of federal taxes --- because they earned 33% of the income. See here.

But I'm sure that a lot of people do agree with this position or world view or whatever you want to call it. They would like it even better if he said that the top 5% pay 98% of all taxes. After all, they did pay that fraction of the estate tax. (Because they had 98% of the taxable estates.)

Not that it matters a whole lot. According to Intrade, Thompson only has a 6% chance of getting nominated. But hey, maybe Thompson would read that as 60%.

Posted by Jim Harris at November 16, 2007 07:31 AM

Fred may not be perfect (who is?) but nobody else even comes close. He's got substance. He's honest in a way that can't be faked. He will be able to manage congressional spending and prepare our military for the bigger threats ahead. I think he will surprise everybody. They may not like how he talks, but just watch how he murders Hillary in a ono-on-one debate. Besides, Bush lowered the bar pretty well with regard to communication skills and Hillary isn't much better.

I don't think Fred will disappoint as the last three have (again, a pretty low bar.)

Posted by ken anthony at November 16, 2007 07:52 AM

Ummm... yeah. Tort reform?

Yeah, 10 years ago, I would have been really interested in it. In another 10 years, I might be.

Right now? There's a war on, and while we might be winning parts of it (Iraq), there are other parts (Iran, Pakistan) that will likely prove to be the decisive diplomatic or military campaigns, and victory is and has never been a sure thing.

Posted by Big D at November 16, 2007 08:31 AM

Jim Harris:

Nice job of ignoring the forest for the trees. Whatever the exact percentages, it's indisputable that our tax system is steeply progressive and that top Democrats want to make it more progressive. Thompson saw the issue clearly, pointed out that increasing progressivity will diminish productivity, and asked the big question that Republicans are usually not sharp enough to ask: What percentage of our income should the govt take? I would like to hear one of our MSM geniuses put this question to all candidates in a debate, though it will never happen.

Posted by Jonathan at November 16, 2007 09:08 AM

Thompson saw the issue clearly

How clear could his vision be if his numbers are wrong? This is a "position" that he has repeated many times. You would think that he'd check the numbers.

But hey, if he thinks that the top 5% pay 60% of the taxes when they actually pay 40% of the taxes, then you can see how that would keep his campaign going. He has about 15% national support in the primary according to the polls, while Giuliani has 30%. But maybe one of his "positions" is to switch those two numbers.

it's indisputable that our tax system is steeply progressive

That depends on what you call "steep". The average federal tax rate among the top 20% is 20.8%. The average federal tax rate among the top tenth of a percent is 21.6%. Is eight-tenths of a percent "steep"?

Okay, if looking at the numbers is missing the forest for the trees, then maybe it is steep. Actually nothing that anyone says is disputable if the numbers aren't important.

Posted by Jim Harris at November 16, 2007 09:27 AM

Methinks Jim doeth protest too much.

Glad to see the fear in your heart at the mention of Fred.

Posted by Mike Puckett at November 16, 2007 12:58 PM

Jim, that is BS.

The government takes more than 50% of my income. I don't care how it is divided, etc. - I only care about the bottom line.

And in a real way, that 50% is slowing down the progress of at least one space service company...

Posted by David Summers at November 16, 2007 01:24 PM

Ok, here's the best I've been able to find (from the CBO) on effective federal tax rates. It is a projection from 2001 to 2014 for the five quintiles and top 1%, 5%, and 10%. There is a similar document detailing past figures. These are 2004 documents, past most of the tax changes, so they don't seem likely to be far off.

According to the CBO, the highest 20% should be seeing a tax burden of 26.5% for this year and the top 5% should be seeing a tax burden of 29.2%. Top 1% would be 30.9%. That doesn't strike me as "steeply progressive", but it's a significant jump.

Posted by Karl Hallowell at November 16, 2007 02:26 PM

Karl, you're just not looking at the right table. The right question is tax rates for brackets of people, not brackets of households. There are a lot of large households that pay high taxes whose constituent people aren't wealthy. For whatever reason, the average tax rate in the top 1% of people (according to CBO) is only 20.9%. Now, still the CBO gets a different table of numbers from the Tax Policy Center. It is not clear what differences in methodology that reflects.

But still, the CBO and the Tax Policy Center do agree that the tax rate for the top 5% is about the same as for the top 1%. The CBO does not list the top tenth of a percent, but the flat top continues. According to the Tax Policy Center, it actually turns around at the tippy-top.

In fact, I know someone whose income is in the top tenth of a percent. He retired at age 40 and all of his income is from stock options. It's all long-term capital gains taxed at 15%. If you work for a salary, then you will certainly never make as much as him, but you will pay taxes at a higher rate. Because, you see, taxing people who don't have to work for a living would hurt productivity.

Posted by Jim Harris at November 16, 2007 05:17 PM

If you work for a salary, then you will certainly never make as much as him, but you will pay taxes at a higher rate. Because, you see, taxing people who don't have to work for a living would hurt productivity.

Yes, it would, because those people take their earnings and reinvest them in things that create more wealth and (yes) improve productivity. But please, continue to flaunt your economic ignorance. It entertains.

Posted by Rand Simberg at November 16, 2007 05:34 PM

"It's all long-term capital gains taxed at 15%. If you work for a salary, then you will certainly never make as much as him, but you will pay taxes at a higher rate. Because, you see, taxing people who don't have to work for a living would hurt productivity."

If you had any intellect, you would understand that capital gains deserves lesser taxation because the investor incurs more risk than a laborer on average.

Posted by Mike Puckett at November 16, 2007 07:41 PM

Karl, you're just not looking at the right table. The right question is tax rates for brackets of people, not brackets of households. There are a lot of large households that pay high taxes whose constituent people aren't wealthy. For whatever reason, the average tax rate in the top 1% of people (according to CBO) is only 20.9%. Now, still the CBO gets a different table of numbers from the Tax Policy Center. It is not clear what differences in methodology that reflects.

Well I don't see such a trivial change resulting in such a large change. I think it more likely you are either quoting some other source (like the Tax Policy Center), which I've been unable to find, or are in error. I would like to see your references here.

Well, I wonder how he got around the alternate minimum tax. That caps out at 26-28% on the amount of stock options he supposedly has.

Posted by Karl Hallowell at November 16, 2007 08:45 PM

Rand Simberg: those people take their earnings and reinvest them in things that create more wealth and (yes) improve productivity

Mike Puckett: the investor incurs more risk than a laborer on average

The guy that I know in the top 0.1% tax bracket is not an investor, he never took any financial risk, and doesn't reinvest his earnings. He only exercises his stock options when he wants to spend money, not reinvest.

But let's say that he did invest some of his drawn income. Well, so do I. I draw a salary and I invest what I don't spend. Why then is his income is taxed at a lower rate than mine? I understand that there is some productivity value in investing money. But then, as a salaried worker, I am that productivity. If I get paid to put together a web site, that's productivity right there, taxed at 33% in my case. But if that same money went to a shareholder who didn't put together the web site, it would be 15%.

The tax code really does read as if it's more productive to put up money than to work. How productive do you think our economy would be if everyone invested and no one did any work? (Answer: It would be as "productive" as a retirement home.)

Well, I wonder how he got around the alternate minimum tax.

The simple answer is that the AMT is not levied on capital gains, even though capital gains affect when it is invoked. If your income is entirely capital gains, you owe no AMT.

Posted by Jim Harris at November 16, 2007 10:25 PM

Also:

I would like to see your references here.

I linked to this above, but it was easy to miss, so here you are again.

Posted by Jim Harris at November 16, 2007 10:29 PM

The simple answer is that the AMT is not levied on capital gains, even though capital gains affect when it is invoked. If your income is entirely capital gains, you owe no AMT.

That appears incorrect though he may have a way to avoid triggering the AMT. And I know that during the 2001 tax season a number of people were burned by the AMT and stock options. Namely, stock options granted by their employer and worth a considerable sum when they vested, triggering the AMT. But the person held on to the options and got burned by a declining stock market. So they ended up with a large AMT, but little in the way of assets to pay for it.

PS, thanks for reposting the Tax Policy Center link.

Posted by Karl Hallowell at November 17, 2007 07:48 AM

That appears incorrect though he may have a way to avoid triggering the AMT.

No, Karl, you didn't read your reference carefully. It describes exactly what I said: The alternative minimum tax is only levied on earned income, but it is levied on a larger fraction of earned income if you have capital gains. Therefore, if you have no earned income, the AMT is irrelevant. I quote from your reference: "Your tax on the capital gain is 15% under both the regular tax and the AMT: $30,000. But under the AMT, the added income wiped out your AMT exemption."

Posted by Jim Harris at November 17, 2007 08:14 AM

The guy that I know in the top 0.1% tax bracket is not an investor, he never took any financial risk, and doesn't reinvest his earnings.

Ah, economics by anecdote.

I'm not going to defend the present tax code--it's nuts, but the notion that productivity comes from "work" and not investment is to subscribe to the labor theory of value (which it wouldn't surprise me if you do). Productivity is a function of what is actually produced, not how much effort is required to produce it. Otherwise the human female pack mules described in Megan McArdle's post would be the most productive people in the world.

Posted by Rand Simberg at November 17, 2007 08:16 AM

Ah, economics by anecdote.

It's not just an anecdote, Rand. There is an entire class of taxpayers who live off of unearned income. They are concentrated in the top 1%, even more in the top 0.1% within the top 1%, and they pay taxes at half the rate of the salaried upper middle class. For instance, Dick Cheney pays at a lower tax rate than George Bush, even though Cheney makes a lot more money. Cheney did not get there by ever putting his wealth at risk, but rather by spending more time than Bush as a corporate executive.

Productivity is a function of what is actually produced, not how much effort is required to produce it.

Of course, Rand, but what is actually produced is what the whole discussion is about. The value of what you produce is reflected in how much you are paid to produce it. So for instance if you are paid $100K to produce a web site, then that is an act of high productivity, and the marginal tax rate for it is 28% to 35%. But if you get $100K because your have shares in the company that made the web site, then your marginal tax rate is 15%. The tax code says that it's better to own a share than to create the value.

Posted by Jim Harris at November 17, 2007 08:56 AM

Jim Harris the point remains that the lower tax on investments is a carrot to get more people to invest. How will they manage to invest? By saving more, how much depends on them (next to zero in my current case if you wondered). Why should one want them to invest? To create an increasingly vibrant economy.

Those companies pay taxes too by the way and the money used for investments has to come from somewhere and has already been taxed at least once. I think the tax rates on savings and investments should be much lower, maybe it should simply be zero.

However I can see how a zero rate could lead to mindblowing differences in wealth leading to "investment monopolies" and other bad effects so perhaps one should have progressive taxation on it:
- 0% up to returns equal to a median income* (this is the crucial part)
- 10% on returns between those equal to a median income and up to those equal to three times a median income
- 20% on only the returns above that (the other returns continue to pay their respective rates of 0% and 10%)

* the median income should probably be calculated on the basis of the five or ten past years so as to make it more stable and predictable.

The more I think about it the more it makes sense to use the median. All numbers taken out of thin air of course, the idea would need serious study if intended to be implemented.

One nice side-effect of the idea is that everyone who invests would benefit directly from a general rise in income. Using a median seems to make it more rewarding for both rich and poor.

Even if this turns out to be a bad idea for savings and investments I really do like the idea of binding progressive taxation to median (or possibly average, although that seems less beneficial) incomes rather than non-relative set figures. It's appears to be so much more simpler, elegant, and sensible. It will still be somewhat arbitrary but less so than simply defining "rich" as a fixed amount of money.

Posted by Habitat Hermit at November 17, 2007 09:15 AM

Jim Harris the point remains that the lower tax on investments is a carrot to get more people to invest.

But it isn't a carrot to invest, it's a carrot to earn from investments, regardless of how little of you invested. After all, these "investments" are increasingly represented by stock options rather than stock. If you are granted stock options, you didn't invest anything.

One interesting example is the former Google masseuse who no longer has to work for a living. She never invested any money; all she did was rub the right people's backs. Now, more power to her for getting rich, but why does she pay taxes at 15%, when new software engineers at Google pay 28% to 35% marginal?

What is true is that the capital gains tax cut is often described as a carrot for investing. That is rather different from what it actually is.

Posted by Jim Harris at November 17, 2007 09:32 AM

Darn those rich! Even if they made their money fairly, by hard work and taking risks, it's not right! Even if they produced inventions or innovations that seriously improved all of our lives, they need to be actively discouraged from ever bothering to do so again.

Look, I grew up on a dirt-poor family farm. I don't have much patience for holier-than-thou "rich are evil" junk--to me, that's the American Dream, and I'd really like to live it someday. And no, I don't intend to get there by lying, cheating, stealing, or "putting down" other folks; the great thing about free markets is that I could get there by *improving* people's lives.

Taxes should be about funding the government, not social engineering or class warfare. And the government should be about protecting us from dire threats, IMHO, and providing a reasonably fair set of ground rules for us to operate under.

Posted by Big D at November 17, 2007 09:40 AM

Even if they made their money fairly, by hard work and taking risks, it's not right!

No, Big D, it's just fine get rich, whether or not you take risks or work hard. It's even fine to get rich by massaging software geeks who grant you stock options. But it isn't so virtuous that it should be taxed at half the rate of ordinary salary.

Posted by Jim Harris at November 17, 2007 10:02 AM

Interestingly, no one has touched on the real reason why capital gains are taxed at the "low" 15% - it is because they are taxed at the corporate rate (35%), and then taxed again at the capital gains rate (15%).

Take this example: I own my own company, providing the world with widgets. I make $10. First, my company pays $3.50 in taxes. Then it takes the rest and gives it to me, and I pay another $1.50 in taxes. So in reality, shareholders are taxed at 40%, about in line with the "evil rich" (TM).

But that is not the end of it - unfortunately there are two methods of getting money, investment and debt. If instead of selling shares you take on a loan, instead of getting taxed on the cost of capital you get a tax writeoff. (This is complex, but look it up here if you are interested: http://www.investopedia.com/terms/w/wacc.asp Note that the calculation involves the corporate tax rate. See also: http://en.wikipedia.org/wiki/Cost_of_capital)

The reason this is bad is that it heavily incentivizes companies to take on debt. In fact, managers are taught in finance classes that you should take on as much debt as you can without risking your business. Obviously, if done correctly that is not a problem - but no matter what, the "double tax" on dividends is forcing companies to take on more credit risk than they would otherwise.

In order to remove taxes from the finance decision equation, you set the capital gains tax rate to zero and adjust the corporate tax rate as required. But because noone understands finance (or economics, it seems), only an evil (and rich) person would suggest such a thing.

Of course, the funniest thing is that those that really do understand all this understand the economy intimately - and so they are rich...

Posted by David Summers at November 17, 2007 01:32 PM

No, they aren't. Corporate profits are taxed at 35%, but they aren't the same as capital gains. In fact, they're one kind of opposite to capital gains, because any profits that are paid out in dividends aren't retained capital. It is true that dividends are often double-taxed, but that is a different matter. The historical corporate response has been to minimize dividends and taxable profits and maximize retained capital. There are a lot of companies with enormous capitalizations and little or no taxable profit.

Posted by Jim Harris at November 17, 2007 02:09 PM

It seems that a "generally sound world view" includes major talking points that are false. One of his positions as listed by Kudlow is that "the top 5 percent pay 60 percent of all tax collections now." But it's not true. The top 5 percent pay about 60 percent of federal income taxes, not all taxes. It's just bad mathematics to take one particular tax and call it all taxes.

And of course you see this as fair. The top 50% of taxpayers pay 85% of the taxes and yet you would like to steal more from them so that the Hillmeister can foist socialized medicine on us.

Posted by at November 17, 2007 04:05 PM

So many people saying so much I disagree with... ^_^

However I at least can't let Jim's comment stand... sorry Jim.

Jim wrote:
"But it isn't a carrot to invest, it's a carrot to earn from investments, regardless of how little of you invested. After all, these "investments" are increasingly represented by stock options rather than stock. If you are granted stock options, you didn't invest anything."

1. If you don't expect to earn from investing there would be zero reason to invest and you might as well enjoy giving the money away instead, you can't get away from that fact.

2. Stock options aren't gratis. That's the case even if the employee has agreed to take part of their pay in prepaid options --that's an investment right there-- that will be exercised for free (since they're prepaid) at a later time. You can't reap benefits from them unless you actually exercise them to buy shares --an investment right there unless they were prepaid as described.

And when you've bought the shares the way to make money is just the same as for anyone else with shares: either sell them at a better price (should be easy when you've exercised stock options or you really messed up) or keep them until they generate returns.

Posted by Habitat Hermit at November 17, 2007 05:47 PM

Corporate profits are taxed at 35%, but they aren't the same as capital gains.

Um, OK - full disclosure, I received an MBA in finance from Northwestern, and I have started 8 companies and own and operate 4. I know somewhat about this...

Company A makes a profit of $10. Company A is owned by shareholders, so by extension the shareholders are now $10 richer. Company A pays taxes at 35%, so now shareholders are only $6.50 richer. Then the company pays a dividend (dividends are defined as company profits distributed to shareholders) of $6.50 - and the shareholder pays 15% taxes on this.

Now, normally paying this double tax doesn't make sense, so in reality the company just reinvests the money. But if you think about it, this only delays the tax. At the end of the day, people buy stock to receive a portion of future cash flows - and these future cash flows will have a 15% tax applied. So even if you plan to just sell the stock (and thus pass the tax to the buyer), since the buyer knows about the tax the price he is willing to pay for the stock is lower.

So, in a perfect world (at least my perfect world) you would lower the capital gains tax rate to 0% on stock sales and dividends, and adjust the coporate tax to balance the cash payments. Investors still "pay" taxes, but the companies do it on their behalf. In fact, the only difference I can see is that companies are no longer incentivized to go deeply into debt just to avoid taxes...

Reading your post, Jim, you seem to think that dividends are tax deductible to the corporation, like interest payments. While I agree that if they were tax deductible the system would make sense (although you would need to raise the capital gains tax rate to match income taxes), dividends are not tax deductible - they are paid from the profits, and count as profit for the company.

This is somewhat different in smaller companies (S-corp, LLC, etc.), but if you are a large company the dividends are always double taxed - as are stock option sales, stock sales, etc.

Posted by D S at November 17, 2007 07:49 PM

But if you think about it, this only delays the tax.

In theory, that's right. However, it's also standard economic theory is that if you can delay expenses out to the horizon without interest penalties, then you have made them disappear.

The bottom line is that total taxable corporate income has always been much smaller than wealth creation as reported by Wall Street. The situation is very complicated with money flowing in many directions, but one way or another, stockholders have seen a much larger bottom line than the federal government.

So the fact remains that there are a lot of people whose main tax bill, even counting corporate taxes, is the capital gains tax, which is 15%. One of them is that Google masseuse. These people not only pay taxes at half rate, they only have to pay taxes on the money that they take out of the pot. Even without a rate change, my tax bill would be a lot lower if I could ask my employer to keep my salary until I wanted to spend it.

So, in a perfect world (at least my perfect world) you would lower the capital gains tax rate to 0% on stock sales and dividends, and adjust the corporate tax to balance the cash payments.

That may be your perfect world. But in a simpler and more transparent world, there would be no corporate tax, and instead all types of personal income would be treated in the same way. The government has no good reason to care how you make money --- whether it's capital gains or salary or dividends or treasure raised from the seabed. All that should matter for income taxes is how much you make.

Posted by Jim Harris at November 17, 2007 08:44 PM

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