Outside the Box

It’s All Very Taxing

November 29, 2011

Today's Outside the Box is something a little different for me. Howard Marks of Oaktree Capital Management has produced a most excellent summary of the problems inherent in "all things taxing" in the US. He delves into not only the specifics but also some of the philosophy of taxation. This is a balanced piece in which he tries to present all sides and arguments, giving us a very real picture of the dilemma we face, and leaving us to draw our own conclusions. Whatever we do going forward, including nothing, the outcome with regard to taxes is going to be difficult if not painful for most of us. We talk about everyone paying their fair share, but what does that mean? The answer is that it means very different things to different people.


This goes hand in hand with my contention that we face very difficult choices, and none of them are pain-free. I have my preferred methods and choices, and you have yours, and your neighbors have yet more divergent views. But we must make the tough decisions, or the market is going to treat us as roughly as it is Italian debt. If we let it get to that point, the choices will be even more limited and painful.


This is a longer than usual OTB but it is very good, and I suggest you send it on to others, as it provides a framework for discussion and understanding the positions that others in our society might take – people of good will but with different understandings of how the world works and what is "fair." Often, their views will not be based on the same rationale as yours or mine, and thus they will come to different conclusions.  But soon we will all make some very important decisions (at the polls) about who will make those decisions for us. Let's choose wisely.


Right now, I am going to choose to hit the send button and go along with my daughter Tiffani to dinner with Art Cashin, Rich Yamarone, and Barry Ritholtz, and see what wisdom they may impart. With Art, you can always count on learning something, and on hearing some wonderful stories. I am sure we will also debate the end of the euro, among other pleasant dinner topics. I live for such moments. I will report back.


Your enjoying a beautiful day in New York City analyst,

John Mauldin, Editor
Outside the Box

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It's All Very Taxing

The issue is simple: the U.S. government generally spends more than it brings in . . . and recently, a lot more. For years Congress was willing to serially raise the federal debt ceiling and monetize the deficit. But this past summer, some legislators balked. When the early August deadline for an increase in the ceiling arrived, our elected officials kicked the can down…

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George Vlahos

Dec. 6, 2011, 12:14 a.m.

Regarding the National Sales Tax (referred to in most industrialized nations as a Value Add Tax).  I understand Howard’s point that a consumption tax is not progressive - but regressive.  However, a couple of points he does not discuss - which is understandable given that it is not meant to be a comprehensive analysis of tax policy - should be considered.

First, though lower income families end up paying a higher portion of there total income toward consumption tax - the overall dollar value paid by higher income families would be significant.  This would definitely provide increase in government revenues. 

Second, one option which many countries implement along with a Value Add tax - is a sales tax rebate for persons below a certain income threshold.  In Canada (I’m a Canadian Citizen), the Federal government provides quarterly sales tax rebates to low income Canadians - to help offset the regressivity of the consumption tax.  Most Canadians consider this fair - and like everything else - you adjust to it.

At this point unfortunately - both spending cuts and tax increases are required to tackle the debt issue.

Emil Assentato

Dec. 4, 2011, 3:17 a.m.

Interesting article. But I wish the author had addressed the issue of ‘cost of capital’ when he discussed higher tax rates. As with the migration of labor markets overseas because of the lower cost productivity, isn’t it possible that the higher cost of capital that higher tax rates bring might drive more investment overseas or further inhibit foreign investment here? Both result in lower employment and less income for the government to tax.  In spite of the rhetoric, the U.S. ranks as the second highest country in statutory and top five in effective corporate tax rates, just slightly lower than Japan. But I understand Japan is in the middle of lowering their corporate tax rates. Clearly higher taxes are in our future, but there will be unintended consequences which I don’t hear anyone seriously consider. We are not an island, we are competing in a global economy. It is not 1950, it is 2011 and we don’t have the infrastructure advantage or the better educated work force we once had. It seems to me much of the world has caught up.

tax payer

Dec. 1, 2011, 8:48 p.m.

Actually a very good article, as far as it goes, but omits two important ideas.  First of all, the very wealthy have access to all kinds of customized tax breaks, such that their reported income is much less than their effective income (Search “wealth defense industry” to learn more about this.)  I don’t know how these breaks can be eliminated as long as the wealthy are able to buy elections.

Second, there is no mention of the concept of economic rent.  If our revenue came from economic rent taxed at a very high rate, with no tax on productive activity, we would have far less unemployment and working people would have higher incomes.  On the whole, the wealthy would pay much more, but the main benefit is that productive people would pay much less.  The land value tax would be a good component of this reform.

Russ Abbott

Nov. 30, 2011, 7:41 p.m.

Almost in response to this Jarad Bernstein has a piece about changes in income since 1979 (See graph here: http://images.huffingtonpost.com/2011-11-30-cbo_ineq1.png). In summary after tax income rose the following amounts for the following groups.

Bottom 20% - 18%
Middle 60%  - 38%
Next 19%    - 65%
Top 1%      - 277%

Note that this is after taxes.  So even though the top 1% pay a larger share of taxes than other groups their after tax income gains far outstripped those of everyone else.

Michael Haley

Nov. 30, 2011, 6:39 a.m.

Marks attempts to be impartial, and does well, but comes off as a Republican-wealthy biased writer when he fails to note that the reason some want “redistribution” as he calls it is not out of “fairness” but because they believe the system is corrupt, and getting worse. I don’t begrudge people getting rich, but I do begrudge cheating which I believe is getting worse and worse.

Also, redistribution is practically a propaganda term. Some want it perhaps, but more it is about, who can afford to pay off this massive deficit? People making $25,000 a year whose incomes are going down, or people making $25 million a year whose incomes are going up?

Few Americans want redistribution in the socialist sense, they want the bills paid.

Duncan Hume

Nov. 30, 2011, 5:44 a.m.

One reason for taxing the wealthy more than the poor is that they have more influence in the affairs of the nation, they are in a better position to influence how the tax dollars are being spent. Another is that the rich are further removed from the poverty so they can afford to pay more. The article talks about fairness of the tax system but what about fairness of remuneration? pay increases for top income earners have vastly surpassed that for the masses for a multitude of reasons none of which seem to relate to merit, and how about the children of the wealthy who are able to afford the educations that are no longer available to the poor, is this fair.
Worrying about fairness is a red herring, the immediate issue should be to balance the budget, raise everyone’s taxes to cover the expenses. This should be done immediately, waiting for ‘better times’ while things get worse is simply not going to work! hopefully increased taxes will focus the minds of the people on getting the spending of their elected representatives under control.
This is not going to be easy.

Bill Scheerer

Nov. 30, 2011, 3:23 a.m.

The article is great for describing alternate points of view, but it incorporates opinion and misleading statements as well.

For example. it suggests that the bottom 50% paying only 3% of the taxes is too low, but it does not sound low when we consider that the bottom 50% only has about 3% of the US wealth.  Many huge, profitable corporations pay zero or very low taxes.  Perhaps the real income redistribution is from the bottom to the top.

And one fundamental point is totally absent.  In the discussion of tax deductions, the author rightly points out that these amount to a shifting of the tax burden from one individual, or community, or state to another.  He frames this as a discourse on deciding what is fair.  And â?? in general â?? he is correct.  What he does not recognize in his article is that many of the current deductions are pinpointed to provide advantage to a person, or very special interest group, or company, or politician, without a societal benefit of any kind.  These amount to simple greed and misuse of our system (and are not limited to one party or another).  He also ignores the fact that the owners of our businesses did what I predicted in the 1980s.  At that time, many manufacturing jobs were being moved overseas to take advantage of cheaper labor.  I opined then that the jobs of engineers and lower-level managers would be next, and the higher managers next, leaving only the NEOs and the financial institutions (and, of course, politicians) employed at levels above McDonalds.  So the richest benefited and the rest of us are screwed â?? pretty much what we see in America today.

Another â??missâ? in the article relates to his statement that a high percentage pay no income tax.  While not stated, the clear implication is that these are the bottom of our society (and that they are lazy, unproductive, etc).  A very conservative newsletter I receive makes the claim that 46% of those earning more than $250k/year pay NO federal income tax â?? and then offers to show the reader how he/she can achieve the same status.  Thus the richest Americans have about the same percentage of non-tax-paying individuals as those lower in the social scale.  Hardly seems fair.

One last point (although there are others):  There is much evidence that decreasing the tax rates of the wealthy did NOT have any trickle-down positive impact.  Reagan paid for his give-backs to the rich with money borrowed (largely from the Japanese) while moving us from the largest creditor to the largest debtor nation, endangering the nationâ??s economic future.  [At the same time, he gave the US a positive spirit that was so much better than his woebegone predecessor.]  What we have done since WW II is move the nation from one of common purpose and great opportunity to one where the greediest wins, and everyone else loses.

Dan Ross

Nov. 29, 2011, 11:13 p.m.

Your tax dollars at work.


The former superintendent of the Philadelphia school system, who received a $900K buyout package just applied for unemployment!

So tell me again what the problem is?

Dan Ross

Nov. 29, 2011, 11:01 p.m.

Interesting article, but subtly biased.  The author blithely assumes spending will go down.  Can’t say I am as sanguine.  Some other thoughts are:

* Can’t discuss taxes in a vacuum.
* Tax them super-rich 100%!  Now lets solve the real problems.
* Beware middle class.  We are next.
* We need jobs!  Not welfare.  The inequity gap is caused by lack of       competitiveness.  Blame unions…partially.  More taxes won’t go for enhanced competitiveness. After all, they are politicians.
* Military and economic might go hand in hand.  Don’t be naive.  Subscribe to Stratfor.
* And 40%+ pay no taxes?  Surely you jest!
* CBO…who believes them?  I can do spreadsheets too.
* Interesting small counter-trend going on.  Skilled trades are in demand.
* Tax receipts are down due to the economy, not tax policy.
* $1 to the gov’ment does not equal $1 to an entrepreneur.
*  Entitlements need to be means-adjusted and age-adjusted.

This was definitely Outside the Box.  Kudos to John.  But seriously?

Ron Kirby

Nov. 29, 2011, 10:53 p.m.

Good article overall.  However, the author does not understand the economics of renting vs. home ownership. Rent prices are already reduced by competition to consider not only property taxes and interest expense, but also depreciation, all of which the landlord can deduct as business expenses. So it’s not imbalanced to allow at least two of those deductions to homeowners. However, the imbalance does apply to the 50% of homeowners who own their house outright—they get no interest deduction at all. Which is ironic since of the three situations they provide the most stability in the economic system.

Of course this is typical when the government tries to do economic manipulation—the worst situations are usually promoted in the interest of “fairness”.  This is why I support any system that would set straight tax rates with no deductions allowed at all—whether flat or tiered rates. It also would be great if we had a constitutional amendment to keep Congress from making any law favoring one business or industry over another—eliminating all preferential subsidies, tax breaks, grants, all of it. This would help everyone to feel the system was fair (because Congress would have fewer perqs to hand out), and it would remove some of the huge distortions from the economy.

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