Tax incidence and rates.

For this discussion, I want to set aside arguments over who "deserves" to pay what and get some thoughts on the nuts and bolts of tax policy. In discussions of this I often find myself not so much worried about whether or not 35% is "better" than 39%, but over whether or not any extra money actually comes in. A recent object lesson.

In Britain as part of the "austerity" budget of Gordon Brown in '09-10, the top marginal tax rate on incomes was raised to 50%. In the following year, the number of tax filers who claimed under that rate fell from ~16,000 to ~6,000. The UK treasury (Office of the Exchequer?) lost seven billion pounds from the rate increase. This past year, they dropped the rate from 50% to 45%, and the number of filers jumped to ~10,000. Still a third lower than what they had originally.

The point is that there is human response to governmental policy. And just because rates rise doesn't mean the government makes any more money. This is not to argue whether or not the government should make as much money as possible, only whether or not tax policy is even capable of that. This may vary by country, some countries appear willing to pay real tax rates much higher than others. In the US, the top effective tax rate has been right about 30% for eighty years, while the supposed top rate has fluctuated from 90% to 35%. That seems to be the tipping point where the rich start moving their money to escape taxation. In scandinavia, they've been able to charge much higher rates, but even they had a bad case of running off the wealthy for a while.

So, two questions especially for those who support tax increases on the "wealthy" (however that is defined).

1: Do you think that the rich will actually pay more under the higher rate, or is the illusion of soaking the rich enough?

2: In a global economy with a relatively free society, how can government reliably regulate the movement of money to exact more than people want to pay?

Do you have a source for any of those figures?

Macomber:
1: Do you think that the rich will actually pay more under the higher rate, or is the illusion of soaking the rich enough?

There will always be loopholes, for those determined enough to find them, and given that rich people have generally gotten rich by being very determined to keep hold of their money then I'm sure someone will come up with something. I think politically, just looking as if you're going after rich people will win some points in a post-banking crisis society will net you some votes, but you have to pick the right targets.

Celebrities and bankers are acceptable. We're jealous, and so hate them.

Basically you have to balance the percentage you want to tax them with how much you think they'd be willing to pay vs how hard they would work to find loopholes.

In short, make it in their best interest ot pay the rates by making it not worth it to try and avoid them.

Or, rather than essentially bribing people to pay their due, while the rest of us either have to pony up or face criminal charges, we could just close the fucking loopholes. Someone will lament how difficult that would be, but frankly if we're not willing to be as determined in pursuing the money the wealthy are due to pay as they are to avoid paying, we can hardly complain when they beat the system.

The number of millionaires doesn't matter if the overall tax income increases, which it did by a billion pounds.

Osborne is getting rid of the additional tax rate because it's only a billion pounds and below the 2.5 billion it should have earned. Of course it fell below the figure because a lot of people on self-assessment tax returns pushed their income back into the previous year and did it at the lower rate that was then in place - a one off option which was only available to them for that single tax year.

So basically this is meaningless and Osborne is a Tory piece of shit who's protecting his base (the rich) at the expense of the country, as per the norm.

Magichead:
Or, rather than essentially bribing people to pay their due, while the rest of us either have to pony up or face criminal charges, we could just close the fucking loopholes. Someone will lament how difficult that would be, but frankly if we're not willing to be as determined in pursuing the money the wealthy are due to pay as they are to avoid paying, we can hardly complain when they beat the system.

And how exactly do you do that in a relatively open society where, presumably, people can send their money to whatever country they like? And their citizenship? And their companies? It's a drastic move to leave one's home culture, but a few million dollars can cushion the shock, I'm sure. The point of the second question was precisely this. "Close the loopholes" sounds great. How? Because "loopholes" are things that people like individually but castigate collectively. The mortgage deduction, the dependent child credit, charity work, environmental incentives, veteran hiring rebates, etc. etc. All those "loopholes" are things that sounded like great ideas. How does one close the loopholes without hurting the private charity that helps the poor, the sick, the battered women? How does one close the child credit loophole without hurting poor people more than rich, due to their higher birthrate? This is the whole point of this thread, governmental policy is easy to criticize, because it's so often stupid. But it's incredibly hard to get right, and human behavior is unpredictable.

Macomber:
The reporting is a bit biased, but the figures are here:

I see you a biased source, and I raise you a slightly less biased source.

http://www.taxresearch.org.uk/Blog/2012/11/28/the-telegraphs-claim-that-all-the-rich-have-run-away-because-of-50p-tax-is-completely-bogus/

Summary: The Torygraph article hinges on the figure that 16,000 people claimed income of over 1 million at the 45p rate and then 6,000 claimed it at the 50p rate. This is true, but it is actually due to people simply shifting their income forward one year in order to benefit from the lower rate of tax, meaning that the 2009-2010 revenues were artificially high and the 2010-2011 revenues were artificially low. Now the tax rate has been lowered again, the reverse is likely to be true. People will defer their income until the new rate kicks in.

It's not people leaving the country. It's a massive (albeit one off) exercise in tax avoidance by people remaining in the country, and the same excercise is likely to be repeated now that the tax rate is going down again. In short, this is non-story in which a well known phenomena is being wilfully misrepresented as something it is not.

evilthecat:

Macomber:
The reporting is a bit biased, but the figures are here:

I see you a biased source, and I raise you a slightly less biased source.

http://www.taxresearch.org.uk/Blog/2012/11/28/the-telegraphs-claim-that-all-the-rich-have-run-away-because-of-50p-tax-is-completely-bogus/

Summary: The Torygraph article hinges on the figure that 16,000 people claimed income of over 1 million at the 45p rate and then 6,000 claimed it at the 50p rate. This is true, but it is actually due to people simply shifting their income forward one year in order to benefit from the lower rate of tax, meaning that the 2009-2010 revenues were artificially high and the 2010-2011 revenues were artificially low. Now the tax rate has been lowered again, the reverse is likely to be true. People will defer their income until the new rate kicks in.

It's not people leaving the country. It's a massive (albeit one off) exercise in tax avoidance by people remaining in the country, and the same excercise is likely to be repeated now that the tax rate is going down again. In short, this is non-story in which a well known phenomena is being wilfully misrepresented as something it is not.

I guess Brits are better than Americans in that regard, although we did fight that whole Revolutionary War thing over taxes, so...

http://www.cbsnews.com/video/watch/?id=7360932n

http://online.wsj.com/article/SB10000872396390444230504577615232602107536.html?mod=ITP_marketplace_0

http://blogs.cfr.org/renewing-america/2012/03/06/why-companies-are-leaving-the-united-states-and-how-to-get-them-back/

http://blog.heritage.org/2012/08/30/no-surprise-u-s-corporate-taxes-driving-businesses-abroad/

The first link is most important; the others are just sort of supplementary.

It counts for Brits too, though. If you push them too much, they'll just take their money to Switzerland like the Americans are.

evilthecat:
This is true, but it is actually due to people simply shifting their income forward one year in order to benefit from the lower rate of tax, meaning that the 2009-2010 revenues were artificially high and the 2010-2011 revenues were artificially low.

Explanation buddy!

Kopikatsu:
snip

While I can't really fault the validity of the sources there because I don't know enough about them, but it does strike me that those articles are all talking about corporation taxes charged to companies, not personal income taxes.

..and this is also true in countries which have lower corporation tax, like the UK. In a well-publicized example here, Starbucks has managed to pay no corporation tax in the UK for quite some time (despite profits of 400 million) by making "royalty payments" to its sister franchises and then reporting a loss to the inland revenue.

It strikes me that the way to fix that is not to lower taxes and cross your fingers that they will develop a sense of responsibility, but to make the tax system better at taxing multinationals on the profits they make within a country even if they then funnel it outside the country to some tax haven. If you're a business seeking to be as competative as possible, you're not going to pay more tax than you possibly have to. So I don't really think there's a case that lowering taxes automatically reduces tax avoidance.

And even so, this is different from saying that rich people will just up and leave. Individuals are not corporations based in multiple countries, and it's much harder for them to move their personal incomes overseas without falling foul of existing laws prohibiting tax evasion.

Tarrou:

Magichead:
Or, rather than essentially bribing people to pay their due, while the rest of us either have to pony up or face criminal charges, we could just close the fucking loopholes. Someone will lament how difficult that would be, but frankly if we're not willing to be as determined in pursuing the money the wealthy are due to pay as they are to avoid paying, we can hardly complain when they beat the system.

And how exactly do you do that in a relatively open society where, presumably, people can send their money to whatever country they like? And their citizenship? And their companies? It's a drastic move to leave one's home culture, but a few million dollars can cushion the shock, I'm sure. The point of the second question was precisely this. "Close the loopholes" sounds great. How? Because "loopholes" are things that people like individually but castigate collectively. The mortgage deduction, the dependent child credit, charity work, environmental incentives, veteran hiring rebates, etc. etc. All those "loopholes" are things that sounded like great ideas. How does one close the loopholes without hurting the private charity that helps the poor, the sick, the battered women? How does one close the child credit loophole without hurting poor people more than rich, due to their higher birthrate? This is the whole point of this thread, governmental policy is easy to criticize, because it's so often stupid. But it's incredibly hard to get right, and human behavior is unpredictable.

False equivalence; rebates given to ameliorate poverty or encourage economic activity are not loopholes, no matter how much the right stamp their feet and insist otherwise. Loopholes are the legal trickery inserted into the tax code as a result of corporate lobbying and cronyism which allow a company earning hundreds of millions in profit to funnel it through foreign subsidiaries, holding companies, and non-profits designed to launder money to pay 0% tax on that profit, or which allow wealthy individuals to do the same by exploiting familial connections or residency status. Those can be eradicated if there is the will to do so.

As for how exactly I would do that in an open society? Easy enough; if you make money in a country, you are taxed by that country, no exceptions. Done. It doesn't need to be complicated, and it doesn't need to affect anyone but the intended target, all that is required is rational thought and the political will necessary to overcome the corruption inherent to wealth and power.

Macomber:
[snip]

Most of this is a distraction from the actual problem; multinationals are paying too little tax.

Take Google. It uses the 'Double Irish Dutch Sandwich' method to pay ~12% tax, despite the fact that much of the IP Google uses to make all its money was developed in US universities using tax payer funds.

Apple pays less than 2% tax on any earnings outside the US, using a scheme similar to the 'Double Irish Dutch Sandwich'.

We need to close these loopholes and collect a reasonable amount of tax on the use of this IP.

http://en.wikipedia.org/wiki/Double_Irish_arrangement

http://www.abc.net.au/insidebusiness/content/2011/s3640316.htm

I say point our military at any country that's currently being used as a tax shelter. If the rich are so willing to put their money someplace we can't touch it, our government should be equally willing to use any means at their disposal to make sure everyone pays what is owed. Think of it this way - it can be argued that Bush went into Iraq for purely financial reasons. Why not take a team of CIA agents to pull an Oceans 11-style funds audit in the Caymans using similar reasoning?

Remus:
I say point our military at any country that's currently being used as a tax shelter. If the rich are so willing to put their money someplace we can't touch it, our government should be equally willing to use any means at their disposal to make sure everyone pays what is owed. Think of it this way - it can be argued that Bush went into Iraq for purely financial reasons. Why not take a team of CIA agents to pull an Oceans 11-style funds audit in the Caymans using similar reasoning?

Yeah, that's a catastrophically bad idea. Fortunately in this case, the rich people run the government, and wouldn't allow that to happen.

there is a solution: stop making so many small countries. we should ahve a minimum size for a country, and an island should not be allowed to be some free country independent of the world. we dont need 200+ countries. world would be much bettero ff if it consisted of 20 countries instead.

Overhead:

evilthecat:
This is true, but it is actually due to people simply shifting their income forward one year in order to benefit from the lower rate of tax, meaning that the 2009-2010 revenues were artificially high and the 2010-2011 revenues were artificially low.

Explanation buddy!

There are means to defer or bring forward income that make it quite easy to avoid temporary taxes (such as the 50%). For instance, if you own your own company, "invest" your income into it or drop your salary, let the money sit in the company for a year or two, and when the tax rate drops again, pay yourself all you didn't before. Or alternatively, if you know the tax hit is coming, pay yourself early and drop the pay for the tax. Or find a way to convert salary into capital gains; say, drop your salary 50%, and declare it as corporate profit instead. Lots of other ways exist for the wealthy to play around with when or how they declare their incomes.

As far as I can see we have no idea what happened with the 50p tax band. There was certainly a huge distortion as people shifted incomes around, which is a lot of why analysts can't actually draw any useful conclusions as to whether it did any good or bad. There are of course a lot of people willing to say it was beneficial or detrimental on the basis of such-and-such a study (such as the MP touting crap in the Telegraph as the OP cites), but I'm willing to bet it's a crummy study.

Agema:

Overhead:

evilthecat:
This is true, but it is actually due to people simply shifting their income forward one year in order to benefit from the lower rate of tax, meaning that the 2009-2010 revenues were artificially high and the 2010-2011 revenues were artificially low.

Explanation buddy!

There are means to defer or bring forward income that make it quite easy to avoid temporary taxes (such as the 50%). For instance, if you own your own company, "invest" your income into it or drop your salary, let the money sit in the company for a year or two, and when the tax rate drops again, pay yourself all you didn't before. Or alternatively, if you know the tax hit is coming, pay yourself early and drop the pay for the tax. Or find a way to convert salary into capital gains; say, drop your salary 50%, and declare it as corporate profit instead. Lots of other ways exist for the wealthy to play around with when or how they declare their incomes.

As far as I can see we have no idea what happened with the 50p tax band. There was certainly a huge distortion as people shifted incomes around, which is a lot of why analysts can't actually draw any useful conclusions as to whether it did any good or bad. There are of course a lot of people willing to say it was beneficial or detrimental on the basis of such-and-such a study (such as the MP touting crap in the Telegraph as the OP cites), but I'm willing to bet it's a crummy study.

I meant that we were explanation buddies who had given the same explanation in our posts, not that I wanted any further explanation.

You can close as many tax loopholes, and hire as many tax collectors as you want. The rich will just move some place else. Some place on this planet will have lower tax rates. To make people pay 50 percent is insane when they could just move, and in the end just burdens the middle class vs the upper classes.

Bad news guys. All that money we borrowed is about to be due, all of our taxes are going up.

Gergar12:
You can close as many tax loopholes, and hire as many tax collectors as you want. The rich will just move some place else. Some place on this planet will have lower tax rates. To make people pay 50 percent is insane when they could just move, and in the end just burdens the middle class vs the upper classes.

You are ignoring that income is taxed where it is generated, so the rich moving their residence from one country to another does not reduce their tax bill (unless they can also move the source of their income, which is usually impossible).

Also you ignore that many other countries do not allow non citizens full rights. For example non Thai citizens cannot own land, they can only lease land for 30 years (and it is difficult to become a Thai citizen).

TechNoFear:

Gergar12:
You can close as many tax loopholes, and hire as many tax collectors as you want. The rich will just move some place else. Some place on this planet will have lower tax rates. To make people pay 50 percent is insane when they could just move, and in the end just burdens the middle class vs the upper classes.

You are ignoring that income is taxed where it is generated, so the rich moving their residence from one country to another does not reduce their tax bill (unless they can also move the source of their income, which is usually impossible).

Also you ignore that many other countries do not allow non citizens full rights. For example non Thai citizens cannot own land, they can only lease land for 30 years (and it is difficult to become a Thai citizen).

Depends on the country, sources of income, and what are the tax agreements between those countries.
In the UK there is a nut case millionaire that avoids a large portion of the taxation by staying in the air[1]...
Couple of my coworkers are UK citizens which still have investments and real estate that the lease in the UK, they don't pay taxes on any of the income earned if they spend less than 180 days a year in the UK.
Most countries have tax agreements with other countries to allow workers which are stationed overseas, or migrate to another country to pay taxes locally and to avoid double taxation while keeping their social benefits(from both countries). These legislation allow most people to avoid taxation if they are not residents of a country irregardless of their citizenship.

Verbatim:
Couple of my coworkers are UK citizens which still have investments and real estate that the lease in the UK, they don't pay taxes on any of the income earned if they spend less than 180 days a year in the UK.

This is no longer correct. You can be taxed as a UK resident if you just visit the UK frequently (if the UK decides too tax you).

I assume your coworkers do not generate the majority of their income in the UK (or it is not a significant amount), nor frequently visit the UK.

As we are talking about 'the rich', I think that the UK tax office might be more interested in taxing their very large incomes than your coworkers.

http://www.lowtax.net/lowtax/html/offon/uk/uktax.html

http://www.dailymail.co.uk/news/article-1251633/British-tax-exiles-pressure-landmark-non-dom-case-leaves-millionaire-facing-30m-bill.html

EDIT: I am making the assumption that you and your coworkers are not in 'the rich' income levels (based on a number of factors).

TechNoFear:

Verbatim:
Couple of my coworkers are UK citizens which still have investments and real estate that the lease in the UK, they don't pay taxes on any of the income earned if they spend less than 180 days a year in the UK.

This is no longer correct. You can be taxed as a UK resident if you just visit the UK frequently (if the UK decides too tax you).

I assume your coworkers do not generate the majority of their income in the UK (or it is not a significant amount), nor frequently visit the UK.

As we are talking about 'the rich', I think that the UK tax office might be more interested in taxing their very large incomes than your coworkers.

http://www.lowtax.net/lowtax/html/offon/uk/uktax.html

http://www.dailymail.co.uk/news/article-1251633/British-tax-exiles-pressure-landmark-non-dom-case-leaves-millionaire-facing-30m-bill.html

EDIT: I am making the assumption that you and your coworkers are not in 'the rich' income levels (based on a number of factors).

They do visit, just stay under the limit, as for the amount's i don't know the exact amounts but it's way over the 8000 pounds or so which are tax exempt each year, a decent flat alone in London should yield you around 20-18K a year.
Rich or not every one would find way to pay less taxes, aslong as tax loopholes exist, and many of them do for a good reason, i don't see any thing wrong with that.
As long as you're not doing any thing illegal there is no point of crying about this, what i find amusing is that no here even considered the fact that due to the financial crisis, and the fact that capital gain profits are down all across the board that some of those people actually made less money, and not hidden their income under the mattress.

I see so many comments to the effect of "you can't tax rich people because they'll move their money or flee the country or blah blah blah".

If you reach a point where the wealthy have gamed the system such that they cannot be taxed appropriately, it's time to tear down the system. You can't expect modern civilization to eject the social safety nets so many fought so hard to implement over the last century simply because the ultra wealthy are telling us the cash only flows one way. Redistribution is both necessary and inevitable. I'd rather we did it in a balanced, fair, and nonviolent manner, but if things keep up...

Let's just say I'm starting to see the merit of using our ridiculously bloated military to engage in for-profit operations overseas - and our next target should be the Cayman Islands.

TechNoFear:

Verbatim:
Couple of my coworkers are UK citizens which still have investments and real estate that the lease in the UK, they don't pay taxes on any of the income earned if they spend less than 180 days a year in the UK.

This is no longer correct. You can be taxed as a UK resident if you just visit the UK frequently (if the UK decides too tax you).

That is residency law. You pay taxes in the country you are declared resident in. It is determined by treaty; the UK and whichever country should not double-tax. The UK cannot just tax most people if it feels like it.

* * *

The UK also has a status of people being "domiciled" as well as "resident". "Non-doms" as they are called do not pay taxes on income derived from outside the UK.

In order to become a "non-dom", a non-UK citizen (actually, it's a little more strict than that but...) needs to fill out a simple form saying they will do a few things, a main one of which is not intending to live in the UK permanently. (In practice, plenty effectively do.)

There are various conditions easily got around, or that can be voided by paying 30,000 - which is fairly obviously a tiny fraction of what they might have to pay in tax liabilities. And thus for many foreign residents, the UK effectively functions as a tax haven.

SonicWaffle:

Macomber:
1: Do you think that the rich will actually pay more under the higher rate, or is the illusion of soaking the rich enough?

There will always be loopholes, for those determined enough to find them, and given that rich people have generally gotten rich by being very determined to keep hold of their money then I'm sure someone will come up with something. I think politically, just looking as if you're going after rich people will win some points in a post-banking crisis society will net you some votes, but you have to pick the right targets.

Celebrities and bankers are acceptable. We're jealous, and so hate them.

Also by that logic murder should be legal because some people are gonna be determined to do it anyways.

Damien Granz:

SonicWaffle:

Macomber:
1: Do you think that the rich will actually pay more under the higher rate, or is the illusion of soaking the rich enough?

There will always be loopholes, for those determined enough to find them, and given that rich people have generally gotten rich by being very determined to keep hold of their money then I'm sure someone will come up with something. I think politically, just looking as if you're going after rich people will win some points in a post-banking crisis society will net you some votes, but you have to pick the right targets.

Celebrities and bankers are acceptable. We're jealous, and so hate them.

Also by that logic murder should be legal because some people are gonna be determined to do it anyways.

...are you sure you know what "logic" means? You seem to be saying something that doesn't relate to what I posted.

Macomber:
In the US, the top effective tax rate has been right about 30% for eighty years, while the supposed top rate has fluctuated from 90% to 35%.

Something that occurred to me, what does this "top effective tax rate" of 30% precisely mean? The obvious issues are who is paying it, and on what.

Do you mean 30% tax liabilities of a demographic group? (Which one?) Is this demographic group fairly static? For instance, if you have a threshold of 500k for a 90% tax, inflation and real terms wage increases increase the size of the demographic group paying it (thus generating more revenue).

Do you mean 30% as a proportion some other income (e.g. the percentage of total government revenue gained by income tax)?

Is this 30% effective tax rate over the total tax burden? The maximum tax band refers only to income tax, but what if income tax changes were offset by changes to payroll, sales, capital gains taxes, etc.?

It is hard to see what point can be made with this statistic when it is so imprecise.

Agema:

Macomber:
In the US, the top effective tax rate has been right about 30% for eighty years, while the supposed top rate has fluctuated from 90% to 35%.

Something that occurred to me, what does this "top effective tax rate" of 30% precisely mean? The obvious issues are who is paying it, and on what.

Do you mean 30% tax liabilities of a demographic group? (Which one?) Is this demographic group fairly static? For instance, if you have a threshold of 500k for a 90% tax, inflation and real terms wage increases increase the size of the demographic group paying it (thus generating more revenue).

Do you mean 30% as a proportion some other income (e.g. the percentage of total government revenue gained by income tax)?

Is this 30% effective tax rate over the total tax burden? The maximum tax band refers only to income tax, but what if income tax changes were offset by changes to payroll, sales, capital gains taxes, etc.?

It is hard to see what point can be made with this statistic when it is so imprecise.

Effective top tax rate of 30% means that the tax that the majority of people who fall under the top bracket pay is 30% of income.

image

The horizontal axis is year, the vertical access is money and the different colours represent at which point in time/earnings you are taxed which amount. So for instance from the mid 1940's to the 1960-somethings the top tax rate was about 90% for earnings of around 1m to 800,000 (the entry level for the top rate went down over time).

The reason that 'effective' is mentioned is that people don't just pay their top rate. For one rates are marginal, so look over to the 2010 tax rates on the far right and we'll use those as examples. A person with an income of 1,000,000 pounds would pay the lowest 10% tax rate on their first 8k or so of income. They would then pay 15% on their income from roughly 8k to 20k, 25% on 20k to 60k, 28% on 60k to 110K, 33% on 110k to 350k and would only pay the top rate of 35% on their earnings from 350k to 1m.

Once you include other ways to reduce paid like calculating in things which are tax deductible, like contributions to many pension funds and similar programs, then many people paying the top tax rate have an effective tax rate well below the actual top rate itself.

 

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