How Tax Loopholes Weaken Society

Discussion in 'Budget & Taxes' started by Anikdote, Feb 10, 2012.

  1. Anikdote

    Anikdote Well-Known Member

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    This is a great read I hope some of you will take the time to enjoy. It underscores a long standing topic that many here at PF, on both sides of the aisle agree upon. The tax code is entirely too complicated and it makes it possible for tax payers to duck their responsibility.

    http://www.theatlantic.com/internat...ax-work-arounds-undermine-our-society/252779/

    A few snippets:
     
  2. Not Amused

    Not Amused New Member

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    Politicians on both sides of the aisle made the tax code the mess it is today. And, the tax code is small potatoes compared to what they have done to regulation.

    And, both side of the aisle have cooperated in creating vitriolic "talking points" that keeps the party faithful at each other throats.

    Until we get passed that, they win.
     
  3. Reiver

    Reiver Well-Known Member

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    And your solution? The attempts to correct it have failed miserably. The negative income tax, as an example of how to simplify both income tax and benefit systems, failed because of right wing dogma and its incompatibility with economic reality (i.e. the analysis became too similar to left wing analysis into minimum income guarantees, or demanded inappropriately low levels of basic benefit)
     
  4. Anikdote

    Anikdote Well-Known Member

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    As you mentioned, I'm a fan of a negative income tax with no exemptions. Sure, it's easy to demagogue, but that doesn't make it any less of a quality alternative, just difficult to get politicians on board.

    I haven't seen any attempts. I've heard a lot of rhetoric and "proposed" legislation, but nothing has ever come into fruition.

    I believe I understand the end, that the mandatory minimum incomes were too low for it to be a feasible alternative, to that I'd respond that we might need to reshape the way we view entitlements and percentage of the budget we should allow them to account for. I'm curious if it was contrasted against current benefits or some arbitrary level deemed "appropriate"

    The former I don't understand at all, in what ways was the analysis on NIT similar to minimum income guarantees?
     
  5. Reiver

    Reiver Well-Known Member

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    Where did Friedman go? The problem with the right is that they thought it was a jolly good idea (i.e. it eliminated corner solutions within the classic labour supply model and therefore apparently eliminated disincentive effects associated with the bleedin heart help offered by liberalism), but it doesn't work. The benefit has to be too low or the single tax too high. It only encouraged the rationality of progressivity.

    It would have typically been applied to basic poverty analysis, leading to the similarity with the minimum income guarantee.

    The consequences for the labour supply curve are very similar. The only big difference is a greater likelihood of non-linearity in the pre- and post-tax/transfer wage schedule
     
  6. Anikdote

    Anikdote Well-Known Member

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    The benefit has to be low in order to avoid fraud issues, yes? The solution seems pretty obvious to me, adjust the minimum wage so that no one employed falls below the mandatory minimum and those not working would have a work requirement to receive benefits.

    It's not perfect, but it's certainly superior to the current system.

    And the impact of this is worse than the revenue not being paid in under the current system? You're proving your own point though, any tax plan including, perhaps especially the NIT can be easily demagogue.
     
  7. Reiver

    Reiver Well-Known Member

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    Nope. It has to be low to avoid high marginal rates of tax on those who are net givers

    Note that those in favour of the NIT are typically also believe that the minimum wage reduces employment. The analysis after all is really just based on standard neoclassical labour theory.

    The point is understanding why the right rejected the NIT. It wasn't because of some pressure group influence on maintaining loopholes. It was based on realising that the end result is not agreeable: a simple system that is ultimately reliant on progressive taxation
     
  8. Anikdote

    Anikdote Well-Known Member

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    I don't see why this is an issue, seems pretty easy to address if the up tiers are progressive enough.

    So I'm atypical, most likely a result of my lack of formal education in the area. In either case I'm surprised your taking this stance, aren't you the same person who argued the opposite?

    Is progressivity not a requirement for any viable system? Seems the complaint is that, if the benefits are "adequate", it would be too progressive to the point of being punitive. Reducing benefits and increasing the rate of progressivity address this complaint.
     
  9. Reiver

    Reiver Well-Known Member

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    And that's the problem: NIT can't be sold with progressive taxation. Its supposed to be one single tax rate that simplifies the tax/benefit system such that unemployment and poverty traps are eliminated. In reality, it becomes a significant redistribution policy. Its not restricted to the unemployed who receive the basic benefit.

    I'm merely describing the NIT advocates economic stance and why it was therefore rejected. You know I'm completely in favour, within capitalism, of the integration of tax and benefit.

    Probably, but it isn't a feature deemed to be attractive. There is a failure to appreciate the complexity in how efficiency and equity criteria are related.

    Not quite. The single tax would be deemed to be punitive. There was no reference to progressivity as ultimately a linear labour supply schedule was demanded
     
  10. PatrickT

    PatrickT Well-Known Member

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    The tax code, and the regulations, are stark evidence of the inabiiity of government to manage the details of the world from their isolated perch. They can manage to benefit themselves but not the rest of us.
     
  11. Reiver

    Reiver Well-Known Member

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    Its actually a good effort in avoiding the radical solutions required. Conservatives should love it!
     
  12. Anikdote

    Anikdote Well-Known Member

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    I suppose I'm still not seeing the stark contrast to what we currently have, except that instead of a single tax+benefits scheme, we have it subdivided over dozens of different programs and hundreds of various embedded taxes. It's a radical simplification that would require significantly less overhead, even if there weren't a single rate.

    This I'm aware of, I'm also aware that you do not believe that the minimum wage increases unemployment, which is the portion of your comment I found odd.

    Taxation in general isn't ever attractive aside from usury taxes where the benefits of paying it can be recognized immediately. Seems like a case of perfect being the enemy of good.


    I suppose my naivety is showing again, why is a linear labor supply schedule so desirable?
     
  13. Reiver

    Reiver Well-Known Member

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    Its all about motivation. The neoclassical labour supply model leads to very specific conclusions:

    1) Taxes won't necessarily generate work disincentives (given the backward bending individual schedule where, for high wages, income effects dominate substitution effects), but- when we aggregate to a general labour supply function- they almost certainly do

    2) The biggest problems are generated through non-linearities in the income schedule, with the extreme being 'corner solutions' where disincentives will make marginal shifts in net wage rates irrelevant to the labour supply decision.

    Those were taken to celebrate the NIT. However, the practicalities led to a realisation that non-linearities would have to be created. Whilst there would be improvements via the integration of tax and benefit systems, a progressive system of marginal rate of tax rates would be required. They therefore would have to deliver a result that they were originally trying to eliminate.

    The nasty practicalities of tax policy!
     
  14. Anikdote

    Anikdote Well-Known Member

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    I see the problem, the progressiveness required can lead to reduced revenue as a result of work disincentives created by the tax rate, thereby defeating the entire point of having a highly progressive tax to begin with.

    The issues with an NIT are more clear now, however I will say the concerns facing it are much smaller (from my perspective) than some of the other tax proposals I've heard of.

    I assume that the NIT requiring corner solutions to meet efficiency criteria is an empirical question that's already been answered?
     
  15. Reiver

    Reiver Well-Known Member

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    Its certainly possible to use the NIT framework and have a sufficiently high basic benefit (based on some poverty threshold) and a series of taxes that minimises corner solution problems.
     
  16. Anikdote

    Anikdote Well-Known Member

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    Well golly. Now we're back at the same problem we set out to solve.
     
  17. Reiver

    Reiver Well-Known Member

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    Not really. The biggest problem is always the interaction of tax and benefits. We have to acknowledge that non-linearities can ensure stability in the labour supply decision, but that's often not a problem as institutional constraints often leads to non-desired labour supply outocmes
     
  18. Not Amused

    Not Amused New Member

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    What level of minimum income is required to eliminate poverty?
     
  19. PatrickT

    PatrickT Well-Known Member

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    I assume you're joking. Liberals are the ones with no interest in paying their bills.
     
  20. PatrickT

    PatrickT Well-Known Member

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    More. Always more. What is not required is people working.
     

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