Cafe Hayek: Learn the Laffer Curve

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February 02, 2008

Learn the Laffer Curve

Don Boudreaux

Dan Mitchell - former GMU student, current Cato Institute Senior Fellow, and one of the world's most die-hard Georgia Bulldogs fans - does an absolutely splendid job of explaining the logic of the Laffer Curve in this short video. Enjoy and learn!

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Comments

Excellent! How do I access parts II and III? Thanks

Posted by: Jeff Brown | Feb 2, 2008 3:00:23 PM

First rate. I'm not an economist, but even I realize that the truth is somewhere between the Republican free-lunch approach to tax cuts and the Democratic taxes-don't-matter mentality.

Posted by: Steve | Feb 2, 2008 3:57:17 PM

Keynes, von Mises and others described the "Laffer curve" long before Laffer.

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

High marginal income tax rates were never supposed to collect revenue. They were supposed to encourage tax deductible investments. The top marginal rate of 70% in the seventies was considerably lower than the top marginal rate in the fifties, which was over 90%, yet the fifties were a period of robust growth. "Tax loopholes" were the whole point.

As Roberts notes in a recent blog post here, the Laffer curve effect on Federal revenue in the Bush administration is extremely dubious. Even in the Reagan administration, the effect is debatable, because revenue initially fell and then rose only as GDP rose. This effect could occur on either side of the peak.

Something else followed the Reagan cuts, a plummeting savings rate, ultimately culminating in the negative savings rate we have now, and Reagan also raised taxes substantially, specifically the payroll tax.

But suppose the Laffer curve theorists are right, and we got more Federal revenue by cutting marginal income tax rates, because people realized more taxable income than they would have otherwise. Am I supposed to celebrate this effect? More Federal revenue and less savings or private investment? That's a good thing?

I think not. We may raise marginal income tax rates again precisely in order to cut Federal revenue. In fact, we may encourage this effect by creating an unlimited entitlement to shelter any amount of income in a tax deferred investment account, as radical leftists like Sam Nunn and Pete Domenici advocated in the eighties. We want wealthy people investing directly rather than channeling income to the Congress for more central "investment". That's the whole point of a progressive consumption tax. The point is not to raise revenue. The point is not to raise revenue.

Posted by: Martin Brock | Feb 2, 2008 4:55:01 PM

Thanks, I enjoyed that. I remember learning of the Laffer Curve in an economics course in my Jesuit high school, circa 1988.

Posted by: Chris Meisenzahl | Feb 2, 2008 4:59:17 PM

Very well done. That's what Dr. Laffer has maintained from the beginning. People misconstrue the effect and then laugh at it.

Posted by: Will | Feb 2, 2008 5:27:12 PM

Laffer vs the Supply Siders

Posted by: TGGP | Feb 2, 2008 5:35:59 PM

He says Keynes like "Kanes." I always said "Keens." Which is it?

Posted by: Jacob Oost | Feb 2, 2008 5:56:01 PM

First rate. I'm not an economist, but even I realize that the truth is somewhere between the Republican free-lunch approach to tax cuts and the Democratic taxes-don't-matter mentality.

Posted by: Steve | Feb 2, 2008 3:57:17 PM

Define what "free lunch" means to hard-working businessmen and their employees. Now if you mean that people want their big public-works infrastructure(freeways, high-speed rail, dams, power generation) AND tax cuts, then I agree. However, I think there's enough room in the budget to cut out stuff to leave room for the stuff that benefits everyone. Yeah I'd gut Social Security, Medicare and Welfare direct payments first. That's $1.5 trillion right there! Then I'd make the military more efficient, no need to be spending $500 billion/year, even with the Iraq.

Posted by: FreedomLover | Feb 2, 2008 7:13:36 PM

Posted by: Will | Feb 2, 2008 5:27:12 PM

Laffer vs the Supply Siders

Someone claimed that Laffer wrote in a 2000 WSJ article that the Reagan tax cuts increased revenue, and now he says he never said that. If true, then would shatter Laffer's credibility.

Posted by: FreedomLover | Feb 2, 2008 7:42:40 PM

A letter of mine that the Wall Street Journal did not feel fit to print:

3 December 2007 Editor, The Wall Street Journal 200 Liberty Street New York, NY 10281 Dear Editor:
Over this last year, I have read a handful of opinions in these pages on the topic of tax cuts and how tax cuts increase tax revenue. Rudy Giuliani’s opinion, The Meaning of Fiscal Conservatism (3 December) was the last straw for my level of tolerance on this topic. Enough already!

This isn’t just a criticism of Mr. Giuliani; this is criticism of all fiscal conservatives who have not moved beyond the way the current argument is framed, especially on these op/ed pages. As fiscal conservatives, we will never see reductions in spending if we play nice and try getting the tax rate to some optimal level that attempts to maximize revenue to the U.S. Treasury. We must champion for tax rates that seek to put us on the correct side of the Laffer Curve – the lower tax rate, lower revenue yielding side.

Could it be possible that the fiscal ‘progressives’ have been playing us for fools during the last two decades and that even they know that tax cuts bring in more money in which to spend? Think about that: ‘progressive’ lawmakers ask for government expanding concessions in order to swallow the supposed bitter pill of any proposed tax cut. In the end, the tax cuts are responsible for the additional revenue to pay for such expansions. Progressives are clever. We have not been.

Chipping in on the dicussion above: as to whether or not tax cuts on the income tax side pay for themselves in the longer run or not is debatable. But certainly payroll tax rates are not lowered. And because of that, any increase in economic activity that income tax cuts may bring, will also effect the amount collected in payroll taxes...a 15% tax that one cannot weasel him or herself away from paying.

Posted by: lowcountryjoe | Feb 2, 2008 8:46:02 PM

Yeah I'd gut Social Security, Medicare and Welfare direct payments first. That's $1.5 trillion right there!

Even if Congress couldn't stop you, you wouldn't survive your first term, unless you have alternatives in mind. Marginal income taxes don't fund Social Security and Medicare, not yet anyway. They probably will soon. That's the "trust fund" that Reagan dramatically expanded when cutting marginal income tax rates and that Bush tried to repeal as the bill comes due due.

How much could we raise the payroll tax without cutting revenue? A hell of a lot. When you tax the first dollars of income, you can tax practically to the point of starvation, because people won't starve themselves to avoid your taxes. They might start shooting back, but they won't starve themselves.

A state can tax 100% of income if it feeds taxpayers with tax revenue. [There really is no "income" in this scenario, but that's another story.] It can happen on a small scale. Slavery existed. It's not a myth. Slavery on a massive scale is simply inefficient, in the economic sense of "efficiency". Mass enslavement to a hierarchical authority, as in state socialism, doesn't effectively convey the value of resources. Prices signal little information about the balance of supply and common demand.

When a state feeds people generally, "good nutrition" becomes equivalent to "weapons of mass destruction". It's out there if the statesmen say it is. More likely, you send out your troops to collect grain for export, so you and your cronies can drive Mercedes, and you simply decree that everyone is well fed. Anyone saying otherwise is invisible.

But a marginal consumption tax (which Adam Smith advocated as a "tax on luxury") can approach 100% without starving people. Rates approaching 100% increase individual investment, if the tax doesn't apply to investment. Yes, these rates lower Federal revenue, but that's the whole point. We don't want central authorities reinvesting the income. That's what a wealthy capitalist is supposed to do. It's his job.

When we decide that a few lords of capital have a divine right to build themselves castles, and drive Mercedes, we must expect them to do that. History is overwhelmingly clear on this score.

Castles and Mercedes aren't the only shape this problem takes. A small class of corporatist lords can entitle themselves to years of consuming anything without producing anything themselves. They can grant themselves bank accounts full of cash and purchase entitlement to future tax revenue and other rents. They don't even need the bank accounts full of cash, but they can create these accounts if they want, if the accounts make the entitlements seem more divine.

It happens all the time. I hope it hasn't reached a catastrophic point. We'll know in a few more years. The leading edge of the baby boom hits the customary retirement age around 2010. We don't know yet how much this generation has forbidden us to produce except for their idle consumption, but we'll soon find out. The problem is a lot larger than Social Security. Anyone imagining that Social Security is the only block in this pyramid simply worships a state without this program. We did have states before Social Security. We even had states before income taxes.

Posted by: Martin Brock | Feb 2, 2008 9:21:32 PM

A letter of mine that the Wall Street Journal did not feel fit to print:

I hardly ever read newspapers anymore. Who cares what they print? Post your letter at forums.wsj.com. Letters to the editor are so ... edited.

Posted by: Martin Brock | Feb 2, 2008 9:26:45 PM

Great video. Thanks for posting!

Posted by: Adam | Feb 2, 2008 9:54:11 PM

Could it be possible that the fiscal ‘progressives’ have been playing us for fools during the last two decades and that even they know that tax cuts bring in more money in which to spend?

No, it wasn't the "progressives". It was the "conservatives". That's just a matter of historical fact, and denying it won't rescue "conservatism".

Bushniks really did invent the "war on terror" practically from thin air, almost unilaterally. They didn't invent 9/11, intentionally, but 9/11 was over in a day. Bushniks spent a trillion dollars while most of the rest of the world watched from the sidelines. This scenario is laughably unlike W. W. II, when the U.S. waited until Europe was in flames before sweeping in to seal the fate of fascism.

When we finally declare victory in the "war on terror" and stop the hemorrhaging, we'll only be a bit more anemic. We can expect no transfusions from Europe, and the Chinese apparently don't need our real investment to fuel their growth anymore; otherwise, we wouldn't have this huge current account deficit with them. Maybe they'll buy our pricey real estate. A lot of it's not so pricey by European standards.

Maybe we sealed the fate of fascism, or maybe we only slapped the uglier side of its face. Maybe we were the prettier side already. The ditto heads love to call FDR a "socialist", but policies during his tenure were much more like fascism in fact.

Posted by: Martin Brock | Feb 2, 2008 9:59:23 PM

Martin Gardner was much cleverer than Laffer.

Posted by: Martin Brock | Feb 2, 2008 10:31:22 PM

Well done and War Eagle.

Posted by: billy | Feb 3, 2008 12:57:00 AM

Martin Brock:

You are a bit too obsessed with the rich's playthings. They are not the problem in the economy. Unskilled workers are. You still can't say how do we deal with that. Taxing the rich on the investment or consumption side won't solve that problem, except for salving the hurt feelings of the lower middle class. You seem to worry more about feelings then hard economic facts.

Posted by: FreedomLover | Feb 3, 2008 5:01:36 AM

No, it wasn't the "progressives". It was the "conservatives". That's just a matter of historical fact, and denying it won't rescue "conservatism".

Name me one time that fiscally conservative(classically liberal) representaives have ever had a majority in both chambers of congress. Notice the word fiscally before you answer.

While 9/11 was over with in a day, as per your assertion, it is what happened on 8/2/1990 that led to P.L. 107-243. Now, you can dispute that if you wish but you ought to read through the document before you respond.

Terror will exist in that region until the attitude toward capitalism and the charging of interest (usuary) are changed there. It could be a long time since the only real change can come from within and there's a religous component standing in the way as an obstacle to this economic liberty.

It matters not what you label it; it is not liberty. But since you enjoy the labels -- and I have no place to comment since my letter to the WSJ used labels [I'll comment anyway, though] -- it is certainly not Objectivist.

Posted by: lowcountryjoe | Feb 3, 2008 9:11:27 AM

Martin,

"Something else followed the Reagan cuts, a plummeting savings rate, ultimately culminating in the negative savings rate we have now, and Reagan also raised taxes substantially, specifically the payroll tax."

It would make more sense to attribute the plummeting savings rate to the increased payroll tax. How would letting people keep more of their money cause them to save less? And why would we not assume that people would choose to decrease their savings first when a substantial percentage of their earnings is "reallocated for other uses" by the people who control the state?

Posted by: Randy | Feb 3, 2008 10:22:15 AM

You are a bit too obsessed with the rich's playthings. They are not the problem in the economy. Unskilled workers are. You still can't say how do we deal with that.

You're obsessed with the playthings. I'm discussing investment. Employing idle resources while diminishing central authority is the whole point if a progressive consumption tax.

I've discussed education and retraining in several threads, but the lottery discussed in the "stimulus" thread probably isn't necessary. We may simply leave investment in the hands of the wealthy.

Taxing the rich on the investment or consumption side won't solve that problem, except for salving the hurt feelings of the lower middle class.

A progressive consumption tax doesn't tax the rich. It slashes taxes on the rich so that they can invest more.

You seem to worry more about feelings then hard economic facts.

The obsession with feelings is entirely yours. It's a non-sequitur and a straw man.

Posted by: Martin Brock | Feb 3, 2008 10:49:41 AM

Hypothesis. People tend to spend on the following in order;

1. Necessities
2. Minor luxuries
3. Savings
4. Major luxuries

A increase to the progressive income tax will cut into the spending on major luxuries by the wealthy, which will in turn cut into the earnings of those who provide major luxuries, which will reduce their savings. The increase will also cut directly into the savings of those who have not yet begun to spend on major luxuries.

An increase in a payroll tax will hit primarily at those who have not begun to spend on major luxuries and will therefore decrease their savings and minor luxuries.

Therefore, the primary result of any tax is a greater dependancy on the state to return the savings it has "reallocated".

P.S. Yes, I know I should throw in the phrase marginal propensity at serveral points - but this is a blog comment and I'm trying to keep it short.

Posted by: Randy | Feb 3, 2008 10:53:22 AM

Name me one time that fiscally conservative (classically liberal) representaives have ever had a majority in both chambers of congress. Notice the word fiscally before you answer.

I haven't suggested that classical liberals have ever had a majority in both chambers. You tell me. The fact remains that "conservatives" and not "progressives" have played us for fools as described. I address precisely this point above. Why celebrate increased Federal revenue and a negative savings rate?

While 9/11 was over with in a day, as per your assertion, it is what happened on 8/2/1990 that led to P.L. 107-243. Now, you can dispute that if you wish but you ought to read through the document before you respond.

That PL 107-243 was enacted in 2002 leads little credence to this assertion regardless of the "whereas this" and "whereas that". We might instead have withdrawn forces from Kuwait and Saudi Arabia and lifted sanctions on Iraq earlier. We might instead have reinforced cockpit doors and little else.

Terror will exist in that region until the attitude toward capitalism and the charging of interest (usuary) are changed there. It could be a long time since the only real change can come from within and there's a religous component standing in the way as an obstacle to this economic liberty.

I don't expect the United States to repeal Islam in this part of the world. I've discussed my sympathies with Bentham. See his Defence of Usury.

http://www.econlib.org/library/Bentham/bnthUs.html

But it's irrelevant here. That some policy is effective within the borders of the U.S. is no evidence that U.S. military might can impose the same policy globally or that this imposition is beneficial within the borders of the U.S. or globally.

It matters not what you label it; it is not liberty. But since you enjoy the labels -- and I have no place to comment since my letter to the WSJ used labels [I'll comment anyway, though] -- it is certainly not Objectivist.

Labels have effects; otherwise, politicians wouldn't use them. We're getting the "liberals" back. We may remind them what the word means historically, or we may defend the "conservatives" that precede them on the incredibly dubious grounds that these "conservatives" are more like classical liberals. Objectively, they aren't.

Posted by: Martin Brock | Feb 3, 2008 11:13:28 AM

It would make more sense to attribute the plummeting savings rate to the increased payroll tax.

It was a factor presumably, but the savings rate is an average. If the rate drops, then lower savings by lower income people is not offset by higher savings by higher income people, and we still have the higher Federal revenue, the higher Federal spending as a percent of GDP, the higher deficits and the rest.

How would letting people keep more of their money cause them to save less?

Investment is something people may do with money. The issue is what people do with the money they keep.

And why would we not assume that people would choose to decrease their savings first when a substantial percentage of their earnings is "reallocated for other uses" by the people who control the state?

A progressive consumption tax removes the income of the wealthy from the hands of central authorities. That's the whole point. I'll keep repeating the point until it sinks in. The point is not to raise Federal revenue. The point is not to raise Federal revenue. Raising taxes on the wealthy lowers Federal revenue? I think that's great. I wouldn't have it any other way.

Posted by: Martin Brock | Feb 3, 2008 11:22:56 AM

A increase to the progressive income tax will cut into the spending on major luxuries by the wealthy, which will in turn cut into the earnings of those who provide major luxuries, which will reduce their savings.

Simply ignoring half the proposal doesn't remove it from the record. The wealthy also gain an unlimited entitlement to invest rather than pay the tax. The tax is completely voluntary. Bill Gates may pay no more of the tax than you or I if he chooses.

You're argument incredibly assumes a zero sum game. Building castles is hardly the only possible employment of idle resources, but if you adore castles so much, you may buy a ticket to Biltmore House. This castle employs many people. I've personally witnessed this employment many times, when I've bought tickets.

The increase will also cut directly into the savings of those who have not yet begun to spend on major luxuries.

No. It will increase their savings, as a right to avoid the consumption tax by investing is unlimited. Ignoring the record doesn't change it. Why do you expect investment to fall as we cut taxes on it to nothing?

An increase in a payroll tax will hit primarily at those who have not begun to spend on major luxuries and will therefore decrease their savings and minor luxuries. Therefore, the primary result of any tax is a greater dependancy on the state to return the savings it has "reallocated".

Non sequitur follows non sequitur here. I nowhere defend a payroll tax increase, and I'd would hotly contest any payroll tax rate increase. I'd scuttle the whole program in fact. I've discussed a specific alternative.

P.S. Yes, I know I should throw in the phrase marginal propensity at serveral points - but this is a blog comment and I'm trying to keep it short.

You should throw in "marginal entitlement to investment", because that's what a progressive consumption tax establishes. It's called a progressive "consumption" tax, because it only taxes consumption progressively. It doesn't tax investment at all. Investment is completely tax free. You may keep 100% of your interest, dividends, rents and capital gains as well as the yield of your labor as long as you reinvest the income.

Posted by: Martin Brock | Feb 3, 2008 11:43:48 AM

Your argument incredibly assumes a zero sum game.

Posted by: Martin Brock | Feb 3, 2008 11:45:22 AM

I would hotly contest any payroll tax rate increase.

Posted by: Martin Brock | Feb 3, 2008 11:46:44 AM

Martin,

I wasn't referring to your proposal at all, but only to the effects of taxation as it is. The key point in the hypothesis is that people spend on minor luxuries before they save, and that reallocations by the state therefore come out of savings. A subpoint applicable to your proposal is that spending on major luxuries by those who can afford it only occurs after the desired amount of savings (and investment) has already occurred.

Posted by: Randy | Feb 3, 2008 11:55:17 AM

I wasn't referring to your proposal at all, but only to the effects of taxation as it is.

O.K. I don't advocate taxation as it is.

The key point in the hypothesis is that people spend on minor luxuries before they save, and that reallocations by the state therefore come out of savings.

A progressive consumption tax encourages people to invest before spending on luxuries. That's the whole point. The progressivity makes your distinction between "minor" and "major" luxuries. No one wants to outlaw luxuries generally. When Adam Smith advocates a "tax on luxury" in Wealth of Nations, he doesn't advocate a vow of poverty. He specifically addresses the castles of titular lords.

A subpoint applicable to your proposal is that spending on major luxuries by those who can afford it only occurs after the desired amount of savings (and investment) has already occurred.

Define "desired amount of savings (and investment)". I don't accept your tautology. I recognize no divine right to build castles. I desire an amount of investment precluding private castles. I prefer a greater variety of common goods from which to choose.

Again, when we decide that a few lords of capital have a divine right to build themselves castles, we must expect the castles. The historical record is very clear. When they employ resources to build castles, they don't employ these resources to build other things. I don't want our lords squandering resources on vainglorious nation building and self-aggrandizing missions to the moon either. I want resources organized to produce for common consumption.

Posted by: Martin Brock | Feb 3, 2008 12:33:23 PM

Martin,

Re; "Define "desired amount of savings (and investment)".

Security and/or profit. People don't invest or save for the pure joy of it. They do it either to set aside for future security, or because they recognize an opportunity for profit. The marginal propensity to save/invest declines as the desired level of security rises and as the quality of investment opportunities declines.

I should toss in here that I think that investment is overrated. For investment to be useful, there has to be something useful to invest in. The railroad boom, the auto boom, the information technology boom, etc., and in the interim periods, not so much - with investors dropping wealth into cash, bonds, and real estate just to protect it.

I would also add that I believe the next boom will be in luxuries. Not anything new, just bigger, better, faster versions of what already exists. So while I do see value in an unlimited tax free account - and do see how it could incentivize many people to same more than they do, I see no reason to disincentivize luxury spending, as the increase in luxury spending is what the investors will be investing in.

Posted by: Randy | Feb 3, 2008 12:52:49 PM

That should be "as the desired level of security is achieved" - not rises.

Posted by: Randy | Feb 3, 2008 12:54:17 PM

Randy:

Re; "Define "desired amount of savings (and investment)".
Security and/or profit. People don't invest or save for the pure joy of it. They do it either to set aside for future security, or because they recognize an opportunity for profit.

I have no problem with these motivations to invest, but Bill Gates didn't accumulate a hundred billion dollars worth of assets to secure his daily bread.

The marginal propensity to save/invest declines as the desired level of security rises and as the quality of investment opportunities declines.

The marginal propensity to save/invest does not decline as the level of security rises, not for everyone anyway. Wealth is an end in itself. It's victory in a game of king of the hill. If people didn't pursue ends for this reason, we'd have no Olympic athletes. We can expect people to pursue profits under a progressive consumption tax, and we have historical precedents.

"Quality of investment opportunity" is a relative, subjective judgment. New investment opportunities always exist. We don't want to throw money at novel investment indiscriminately, but no one proposes this policy.

A private castle is not an intrinsically more rational expenditure than a museum that never profits. The castle never profits either. If the museum never profits, investors more likely reorganize the resources, but a castle is never expected to profit.

I should toss in here that I think that investment is overrated. For investment to be useful, there has to be something useful to invest in. The railroad boom, the auto boom, the information technology boom, etc., and in the interim periods, not so much - with investors dropping wealth into cash, bonds, and real estate just to protect it.

Genuine investment is a gamble on the productive or more productive organization of resources. There is always something potentially useful to invest in. There are no interim periods in which these opportunities are absent.

I would also add that I believe the next boom will be in luxuries. Not anything new, just bigger, better, faster versions of what already exists.

Of course, we'll produce better, faster versions of what already exists. Bigger? I don't want a bigger computer. I want a smaller one. My current mp3 player is much smaller than my first. The printer/scanner/copier in my home office is far smaller than anything my father had downtown, and he never had color.

So while I do see value in an unlimited tax free account - and do see how it could incentivize many people to same more than they do, I see no reason to disincentivize luxury spending, as the increase in luxury spending is what the investors will be investing in.

Here again, you simply ignore your own distinction between "minor" and "major" luxuries. A progressive consumption tax doesn't forbid luxuries at all. It channels investment toward a greater variety of more common luxuries, like the automobiles, radios, televisions, record players and rock and roll we produced in the fifties when marginal income tax rates exceeded 90%, while real median income actually rose.

Historical precedent does not support your alarming assertions. Castle builders don't starve when we stop building castles. They find other work. All the Federal employees who would lose their jobs under a progressive consumption tax would also find other work.

Posted by: Martin Brock | Feb 3, 2008 2:31:59 PM

Martin,

You realize that with all your "progressive" income/consumption taxes that if you piss off the rich folks, they'll take their liquidity elsewhere, like Malaysia. Because they can. It's the duty of any nation to not piss off the investor class, because we depend on them for our livelihood. Now the only other solution is to do like Lenin did and kill them all, but where does that leave us except living in a Communist hell-hole.

Posted by: FreedomLover | Feb 3, 2008 2:46:09 PM

You realize that with all your "progressive" income/consumption taxes that if you piss off the rich folks, they'll take their liquidity elsewhere, like Malaysia. Because they can.

That you don't like the word "progressive" doesn't concern me. I'm happy to call the reform something else.

People may sell income earning assets in the U.S. and buy assets elsewhere. That's fine with me. I don't care. Someone else will buy the assets here. We had income tax rates exceeding 90% in the fifties, with exemptions for investment, and everything didn't go to hell in a hand basket. Your alarmist theories in favor of some state you prefer does not contradict empirical experience.

It's the duty of any nation to not piss off the investor class, because we depend on them for our livelihood.

Far from pissing them off, I propose to cut the taxes of the investor class practically to nothing.

Now the only other solution is to do like Lenin did and kill them all, but where does that leave us except living in a Communist hell-hole.

This false choice is simple nonsense. I'm not so simple. Try it on someone else.

Posted by: Martin Brock | Feb 3, 2008 4:24:39 PM

If the 90% income tax rates worked so well, why were they ended?

Posted by: Randy | Feb 3, 2008 4:51:33 PM

If the 90% income tax rates worked so well, why were they ended?

Ask John Fitzgerald Kennedy and his allies in the Congress. Maybe they thought the investment exemptions too limited, though they could have loosened these restrictions. Maybe they wanted more entitlement to marginal consumption. Maybe they wanted more Federal revenue. Whatever their reasons, they made the decision.

I'll emphasize again that I favor high marginal tax rates only in the context of an unlimited entitlement to avoid the tax through investment. I advocate a progressive consumption tax, not a progressive income tax. The point is to channel investment toward expanding and improving the variety of goods and services commonly available, not to raise Federal revenue. Lower Federal revenue is the goal.

Posted by: Martin Brock | Feb 3, 2008 5:29:49 PM

"The point is..., not to raise Federal revenue. Lower Federal revenue is the goal."

I suspect that the political class disagrees with you. I for one think that higher federal revenue is precisely the goal. The available evidence certainly gives me no reason to trust their professions of altruism, and your insistence on granting them a role is my primary point of contention with your ideas.

Posted by: Randy | Feb 3, 2008 5:59:50 PM

I suspect that the political class disagrees with you.

When I say "the point", I mean "my point", not the "the point of the political class". That goes without saying.

I for one think that higher federal revenue is precisely the goal.

Kennedy might have sold it this way. I haven't seen the Congressional record. He probably sold it differently to different people. That's politics. I don't labor long to wonder what he got out of it himself.

The available evidence certainly gives me no reason to trust their professions of altruism, and your insistence on granting them a role is my primary point of contention with your ideas.

I don't grant anyone's role, but I propose to halve Congressional revenue in favor of less central investment. Congressmen and other statesmen write the law governing property. Politicians play this role. You propose nothing else. You just say "political class" derisively when you oppose a reform some reason and say something else when you favor a reform. This rhetoric is persuasive, not to me anyway.

Posted by: Martin Brock | Feb 3, 2008 6:30:47 PM

I don't have a "plan", Martin. My method is to get the believers to understand what kind of people they are placing their faith in. Yes, I use the term "political class" with as much "derision" as I can muster. As far as I'm concerned, they are the type who would rob people in dark alleys if they hadn't stumbled upon a more effective method.

Posted by: Randy | Feb 3, 2008 7:19:46 PM

I don't have a "plan", Martin. My method is to get the believers to understand what kind of people they are placing their faith in.

Of course, you have a plan. Private property, markets and the rest of the rule of law is a plan. It's not "central planning" in the narrow sense of these words, but it certainly is a plan. You don't want everyone free to do anything.

Yes, I use the term "political class" with as much "derision" as I can muster. As far as I'm concerned, they are the type who would rob people in dark alleys if they hadn't stumbled upon a more effective method.

Without a state, you have nothing to rob, because nothing is property. Natural territoriality is not property. Property is forcible propriety, and it is always bounded.

Posted by: Martin Brock | Feb 3, 2008 7:50:48 PM

I would have no problem at all with a state that didn't steal from me. Yes, I know, its not "stealing" because the people doing the stealing say its not. Hey, if that works for you...

Posted by: Randy | Feb 3, 2008 8:31:14 PM

What works for me is irrelevant. "Stealing" violates propriety by definition, and lawmakers define "propriety". We needn't like it, and we can try to change it, for what it's worth. What I won't do, or can't do, is accept it without complaint.

Posted by: Martin Brock | Feb 3, 2008 10:28:16 PM

No Martinduck,

You forget that property is not just land, or maybe you'd like to tailor your statement here:

"Without a state, you have nothing to rob, because nothing is property. Natural territoriality is not property. Property is forcible propriety, and it is always bounded.
Posted by: Martin Brock | Feb 3, 2008 7:50:48 PM"

Humans certainly possessed property long before such a thing as a "state" came into being. The FRNs I get when I cash a client's check is my "property". The car I drive is my "property". The spear that Og carried 30,000 BC was Og's property. The shell necklace Og made for his sweetie Oog was Oog's property.

They even possessed land before states came along, and they held the land until someone with more force came along and took it from them. The fact that it was taken from them did not negate the fact that they possessed it for X amount of time, which may have been centuries.

Property rights are establised by the possession by individuals that can retain it against all challengers (physical or legal) using whatever means, even including the force of a state.

Posted by: vidyohs | Feb 3, 2008 10:36:48 PM

Martinduck,

Furthermore, robbers certainly predated the "state". As a matter of fact robbers and how to deal with them were one of the many reasons for inventing the "state".

Posted by: vidyohs | Feb 3, 2008 10:38:37 PM

Martin,

I supoose that you're one to believe that the state is the entity that grants rights to us, don't you?

Posted by: lowcountryjoe | Feb 3, 2008 11:17:33 PM

I supoose that you're one to believe that the state is the entity that grants rights to us, don't you?

Legal rights are the will of armed men, and pretending that they aren't is the worst possible pretense. If you want to discuss other "rights", you need to define them first.

Posted by: Martin Brock | Feb 3, 2008 11:28:56 PM

Furthermore, robbers certainly predated the "state". As a matter of fact robbers and how to deal with them were one of the many reasons for inventing the "state".

When you tell me what anyone "stole" before the advent of "property", your statement ceases to be nonsense. Acknowledging the reality that forcible propriety is the will of armed men is no endorsement of anything armed men will. Pretending that armed men have some divine right to enforce particular proprieties, because you like them, is incredibly arrogant. I judge forcible proprieties by their consequences, like Milton Friedman and many others.

Posted by: Martin Brock | Feb 3, 2008 11:33:15 PM

vidyohs:

You forget that property is not just land, or maybe you'd like to tailor your statement here:

I hardly forget it. I say it over and over again. For example, I say that Treasury notes are "private property" as well as entitlement to tax revenue, because that's the law as a matter of fact. This statement is no defense of Treasury notes. It's just a fact.

Humans certainly possessed property long before such a thing as a "state" came into being.

You may call something preceding the rule of law "property" if you choose. John Locke did, but his "property" is as meaningless as yours in modernity. It was already meaningless when he described it. I don't live on a Lockean frontier, and in my neck of the words, when people use the word "property", particularly the uniformed people wearing guns, they mean legal entitlement, and that's all they mean.

The FRNs I get when I cash a client's check is my "property".

Exactly. Assuming you obtained the check lawfully.

The car I drive is my "property".

Assuming you have the title.

The spear that Og carried 30,000 BC was Og's property.

No. It was his possession. It might have been Gor's possession a day earlier, and he might well have killed Gor to obtain it.

The shell necklace Og made for his sweetie Oog was Oog's property.

No. That was her possession too. Since Og made it, it's more like Lockean property, but it still isn't "property" in any modern sense.

They even possessed land before states came along, and they held the land until someone with more force came along and took it from them.

Exactly. They possessed it when they could hold it by their own force. This state is natural territoriality, not property. Read Locke. Even he wouldn't call this possession "property". Lockean property doesn't exist among hunter/gatherers. It appears only with agriculture, when one man farms a parcel of land himself. When you show me any reputable authority calling Og's territory "property", you'll have a leg to stand on.

The fact that it was taken from them did not negate the fact that they possessed it for X amount of time, which may have been centuries.

People didn't live for centuries 30,000 years ago, and they certainly had no titles to property, because they had no written language. They didn't even have Lockean property.

http://en.wikipedia.org/wiki/History_of_writing#Proto-writing

Property rights are establised by the possession by individuals that can retain it against all challengers (physical or legal) using whatever means, even including the force of a state.

No. That's territory and possession. It's not at all what we call "property" today. It's not even what Locke called property in the 17th century. Where do you find anyone at any time using the word "property" this way? "Conservatives" don't use the word this way. "Liberals" don't use the word this way. "Libertarians" don't use the word this way. Anthropologists don't use the word this way. Do words simply mean whatever you say they mean?

Posted by: Martin Brock | Feb 4, 2008 12:02:06 AM

Martin,

"What I won't do, or can't do, is accept it without complaint."

So why are you here? If you really want to change the forcible proprieties you need to be debating with the people who exercise them, and you're certainly not going to find such people here. How do you imagine that trying to convince people who believe in liberty that there is no such thing will help you to achieve your objective?

Posted by: Randy | Feb 4, 2008 4:59:06 AM

Martinduck,

Yep the old mulberry bush crap again. Because you can have the time to construct voluminous rebuttals to anything and everything means that you mistake the act of overwhelming as superior knowledge. Tain't so, it is just another trip around the bush.

You're so hung up on the state that you refuse to see anything but your own erroneous twiddle.

Og has it, he keeps it, he uses it, and no one else has access to it, but it isn't property?

Yeah right. Use whatever name you want it makes no difference, the thing was Og's, and that makes it property.

Property is a thing, an object. Possession is an act. Got it?

Contrary to your assertion that no one uses the word property to describe possessions today is blatantly wrong, it is used quite commonly in every taxing office in the land, and so those who pay taxes on property also use it. Which pretty much includes everyone, doesn't it martinduck?

Look back over your shoulder, martinduck. I won't be there to chase you around on what has obviously become another one of your chase me people, chase me.

Posted by: vidyohs | Feb 4, 2008 6:25:37 AM

Legal rights are the will of armed men, and pretending that they aren't is the worst possible pretense. If you want to discuss other "rights", you need to define them first.

I did not ask about legal rights but your answer explains your position very well without needing any further explanation. The rights I'm speaking of are those rights that man is inherently been blessed to have bestowed upon him at birth. It's those armed men that you speak of who take confiscate rights from other men -- rights that they were not entitled to take but have done so anyhow.

Posted by: lowcountryjoe | Feb 4, 2008 7:03:28 AM

So is all human existence is really rule by the most capable then? Anything else is a form of Socialism? Those with the most ability and strength get to have the most power? Beggars can't be choosers and weaklings can never expect to get anywhere in life? So what if the police don't overly tend to check out small crimes committed against the poor? They're least likely to be taxpayers. Heck! In an anarcho-Capitalist society the poor are the least likely to be a market either such that private defense agencies probably wouldn't bother. So the poor have to defend themselves and if they're weaklings they're at the mercy of the strong. If were strong they probably wouldn't be poor in the first place. So what's the big gripe then?

Posted by: Gil | Feb 4, 2008 7:40:10 AM

I did not ask about legal rights but your answer explains your position very well without needing any further explanation.

My answer explains the meaning of "legal right". You're subject to legal rights whether you like them or not, just like the rest of us.

The rights I'm speaking of are those rights that man is inherently been blessed to have bestowed upon him at birth.

Speak of anything you want. You could even be specific, but I'm not holding my breath.

It's those armed men that you speak of who take confiscate rights from other men -- rights that they were not entitled to take but have done so anyhow.

If you want to shoot back, go ahead. Talk is cheap. What are you proposing?

Posted by: Martin Brock | Feb 4, 2008 8:03:09 AM

Property is a thing, an object. Possession is an act. Got it?

No. Property is a legal entitlement. Consult an attorney.

Posted by: Martin Brock | Feb 4, 2008 8:07:59 AM

So why are you here? If you really want to change the forcible proprieties you need to be debating with the people who exercise them, and you're certainly not going to find such people here.

Like I said, we're playing a game here. Why are you here? You think you aren't playing the same game?

How do you imagine that trying to convince people who believe in liberty that there is no such thing will help you to achieve your objective?

What a lot of political b.s. You believe in liberty and motherhood and apple pie, and anyone who disputes you on a particular point is not a true believer in these things.

I'm the believer in liberty here, and you're a poser. See? Anyone can play this childish game.

When you want to address specific reforms and their consequences, we can do that.

Posted by: Martin Brock | Feb 4, 2008 8:14:03 AM

"I'm the believer in liberty here..."

No you're not. You believe that liberty is whatever the state says it is. Such a definition means that the value of liberty is zero - reduce the equation, and you simply believe in the state.

Posted by: Randy | Feb 4, 2008 8:23:50 AM

No you're not. You believe that liberty is whatever the state says it is.

I believe that legal rights are what the state says they are, and you don't clearly understand the difference between legal rights and liberty.

Such a definition means that the value of liberty is zero - reduce the equation, and you simply believe in the state.

No. My definition describes what's actually happening. I nowhere ever define "liberty" at all. That's just your political straw man talking. Anyone may scroll up a few inches on this page and see that you're making it up.

You believe that your payroll taxes are your "savings", because the state tells you so, but the taxes really support your parents. Now, you want the state to sell you Treasury notes to "unburden your children" instead, so you'll be more like the Prince of Wales. Your worthless momma can fend for herself, because while she fed, clothed and housed you for two decades, she was too lazy to find her own Federal Reserve Notes.

The record is very clear.

Posted by: Martin Brock | Feb 4, 2008 10:34:55 AM

So is all human existence is really rule by the most capable then?

We're ruled by the people who make the rules. It's not rocket science.

Posted by: Martin Brock | Feb 4, 2008 10:39:49 AM

Martin,

"...you don't clearly understand the difference between legal rights and liberty.

No, you just don't understand the connection - or, more likely, are deliberately ignoring the connection in order to support your belief in the state.

"You believe that your payroll taxes are your "savings", because the state tells you so..."

No, I believe that they are my savings because that is what I would have if the state hadn't confiscated my earnings.

Posted by: Randy | Feb 4, 2008 10:55:36 AM

You just get sillier and sillier, martinduck.

When your basic premise is wrong it doesn't matter how many times you go around the mulberry bush or how artfully you try to dodge the reality of that basic premise or how large the volumes of words you generate on those trips around the mulberry bush, you're still gonna come out of it wrong and, as now, silly.

"Property is a thing, an object. Possession is an act. Got it?
No. Property is a legal entitlement. Consult an attorney.

Posted by: Martin Brock | Feb 4, 2008 8:07:59 AM"

An entitlement, next it will be a gift, then on the next trip around the bush what will it be, found manna?

Posted by: vidyohs | Feb 4, 2008 11:53:37 AM

Martin_Brock: I don't know why you bring up slavery to dispute the Laffer Curve. In fact, it's a prime example of it in action.

Slaves (and communist citizens) were not 100% taxed -- all of them were allowed to retain a portion of their product in the form of food and various amenities. Slaveholders had very high incentives to maximize their "tax revenues" and many found they could do that by allowing slaves to keep a portion as "incentive pay". In fact, many of them freed their slaves on the condition that the slave would continue to pay an "income tax" (on income derived in a job he would find where he's more productive) lower than the effective tax he paid on the plantation.

Monarchies as well are historical examples of entities with high incentives to find the (a) Laffer point, since instead of any pretense of supporting the public good, they could keep a portion of the revenue themselves, and from what I've read (I can dig up the source) they taxed at around 15%.

In Laffer Curve debates, it's important to recognize that both:

a) raising taxes can reduce tax revenue and vice versa

b) it's far from obvious whether that holds for any *specific* polity at any *specific* time for any *specific* tax.

Typically, both sides agree on a) and b), yet sling mud at each other nonetheless.

Posted by: Person | Feb 4, 2008 11:59:50 AM

No, you just don't understand the connection ...

The record speaks for itself. You may have the last word.

Posted by: Martin Brock | Feb 4, 2008 1:04:30 PM

When your basic premise is wrong it doesn't matter how many times you go around the mulberry bush ...

Writing "wrong" and "mulberry bush" ...

An entitlement, next it will be a gift, then on the next trip around the bush what will it be, found manna?

No, it's a legal right, not a gift, not a voice from a burning bush, not manna from heaven, just an act of lords, legislatures and courts. Face reality.

Posted by: Martin Brock | Feb 4, 2008 1:09:19 PM

Reality is competition, and the political class is just another competitor. Their assertions are nothing more than assertions, and their position is not sacrosanct.

Posted by: Randy | Feb 4, 2008 1:15:55 PM

Person:

Martin_Brock: I don't know why you bring up slavery to dispute the Laffer Curve. In fact, it's a prime example of it in action.

To be clear, I didn't write these words, and I don't dispute the Laffer curve. I didn't bring up slavery to dispute it. My point is that a master could allow his slave no discretion whatever over his product, not that this policy is most productive or most beneficial to the master. I'm sure it's not most productive or most beneficial to anyone.

On the other hand, the rents that baby boomers have arranged for themselves must come from somewhere, and Social Security benefits are only the tip of an iceberg. The question is: who will pay all of these rents?

What happens if Congress does raise the payroll tax rate to "repay the trust fund" created by borrowing earlier payroll taxes? Common people move en masse to Mexico? Canada? Do they take up arms? They vote the bums out? Do the following bums then lower the rate?

Slaves (and communist citizens) were not 100% taxed -- all of them were allowed to retain a portion of their product in the form of food and various amenities.

Of course. The system would have disintegrated even sooner otherwise.

Slaveholders had very high incentives to maximize their "tax revenues" and many found they could do that by allowing slaves to keep a portion as "incentive pay".

That's true too. Share cropping is another example. Then there are monetary rents.

In fact, many of them freed their slaves on the condition that the slave would continue to pay an "income tax" (on income derived in a job he would find where he's more productive) lower than the effective tax he paid on the plantation.

Not surprising. I advocate something similar to finance education. Students owe a percentage of income to an educational institution for a period after graduation, and the obligation is negotiable. If the education turns out to be worthless, the institution's entitlement is also worthless, but the institution may sell it to another institution educating the student differently. This percentage must be limited, of course. Parents choose their children's educators.

Monarchies as well are historical examples of entities with high incentives to find the (a) Laffer point, since instead of any pretense of supporting the public good, they could keep a portion of the revenue themselves, and from what I've read (I can dig up the source) they taxed at around 15%.

Rents will always be with us. The issue is limited authority and centralized authority versus decentralized authority. A progressive consumption tax limits the authority of lords and subjects them to the jury system to a limited extent, and it simultaneously empowers them at the expense of more central legislative and executive authorities.

In Laffer Curve debates, it's important to recognize that both:
a) raising taxes can reduce tax revenue and vice versa

Right. I don't want to raise tax revenue. I want to lower it. That's why I want to raise rates to discourage marginal consumption in favor of centralized investment. This policy is completely consistent with classically liberal principles. It's right out of Adam Smith.

b) it's far from obvious whether that holds for any *specific* polity at any *specific* time for any *specific* tax.
Typically, both sides agree on a) and b), yet sling mud at each other nonetheless.

I'm trying to persuade people to slash taxes on the wealthy, rather than transferring their marginal income to D.C. for disbursement, understanding that the wealthy have a duty to reinvest the income in productive organization satisfying common needs and wants. I advocate this policy, because I advocate productive resources organized by capital markets for this purpose.

Posted by: Martin Brock | Feb 4, 2008 1:41:08 PM

Martin,

You can spin, spin, spin, but all I get from all your collective articles is your hate real capitalism and you want to use the force of the government to implement whatever form of "compassionate capitalism" that you want. I notice how often you use "force of the government" with great approval. I've had ENOUGH of you.

Posted by: FreedomLover | Feb 4, 2008 2:07:39 PM

You can spin, spin, spin, but all I get from all your collective articles is your hate real capitalism and you want to use the force of the government to implement whatever form of "compassionate capitalism" that you want.

That's because you're deaf to anything but the lunatic ravings of your own straw men. I've never said a word about any "compassionate capitalism".

I notice how often you use "force of the government" with great approval. I've had ENOUGH of you.

I never use "force of the government" with great approval. If I had, you could quote me. You're being deceptive for reasons known only to you. If you've had ENOUGH of me, you may easily enough ignore me. We'll see if you can.

Posted by: Martin Brock | Feb 4, 2008 2:25:43 PM

"...understanding that the wealthy have a duty to reinvest the income in productive organization satisfying common needs and wants."

Understood by who? Duty to who? You're just making this crap up as you go aren't you.

Posted by: Randy | Feb 4, 2008 2:54:33 PM

Just occurred to me that raising taxes beyond a certain point has another impact in addition to a decline in revenue. There is also a decline in loyalty and cohesion. Beyond a certain point people just start to feel like they're being screwed. Indeed, that point may be reached far short of the maximum revenue point, and the negative consequences of reaching it may be quite severe. Martin says that our "duty" is "understood". So what happens when that is no longer the case?

Posted by: Randy | Feb 4, 2008 3:26:26 PM

Understood by who? Duty to who? You're just making this crap up as you go aren't you.

Sigh ... Under the progressive consumption tax proposal, wealthy citizens of the U.S. have this duty. If the proposal is enacted, citizens generally understand this duty to be lawful.

Yes, it's made up, but I didn't make it up. Senators Sam Nunn and Pete Domenici made it up in the eighties when they proposed the USA (Unlimited Savings Allowance) tax reform, and they were hardly the first. Again, high marginal income tax rates, with exemptions for investment, were enacted for this purpose. The idea goes back at least to Adam Smith, though he wasn't explicit about enacting it in this form.

I don't believe in rights and duties written on stone tables and handed down directly by God. You can peddle that stuff if you want. I'm stuck with pondering the proposals of men and judging them by their consequences.

Posted by: Martin Brock | Feb 4, 2008 3:34:48 PM

Just occurred to me that raising taxes beyond a certain point has another impact in addition to a decline in revenue. There is also a decline in loyalty and cohesion.

Gee. "Loyalty" and "cohesion" are so easily understood.

Martin says that our "duty" is "understood". So what happens when that is no longer the case?

Martin suggests that common people can understand the purpose of a progressive consumption tax and thus not react politically against a dramatic drop in the income taxes paid by the very wealthy, since this drop is precisely the point of a progressive consumption tax.

Barring other reforms, common people must still pay gasoline taxes to pay for their roads, and they must still taxes for public education and police and fire protection and other services. If they want Social Security or something similar, they must continue paying for these benefits as well. There is no free lunch, but the organization of capital by a market is a separate issue.

Posted by: Martin Brock | Feb 4, 2008 3:47:22 PM

"written on stone tables" should read "written on stone tablets".

Posted by: Martin Brock | Feb 4, 2008 3:48:18 PM

Martin_Brock: Thanks for the reply, I guess I didn't read enough of your position. This comment was interesting:

This is something I've worried about too, but get laughed at whenever I bring it up. That is, there's a risk of a "positive feedback loop" springing up. Government raises taxes, so a few workers find it worthwhile to move to a country without a SS system, which makes it have to raise taxes more, which scarces off more workers, etc. This possibility should be taken into account by anyone intested in policy, since it means the crisis won't happen until it's too late to reverse.

It's my opinion that, far from speculation, this is exactly what has already happened to smaller organizations offering pensions. They found out too late that no one has to work for them, and no one has to buy their stuff, especially when they can get it from providers that don't have useless legacy obligations as a cost. Social Security functions the same way.

Posted by: Person | Feb 4, 2008 4:25:30 PM

All I keep reading from Martin is that the rich have certain "duties" but last I checked the US Constitution, it was mum.

Posted by: FreedomLover | Feb 4, 2008 4:35:48 PM

All I keep reading from Martin is that the rich have certain "duties" but last I checked the US Constitution, it was mum.

If the U.S. Constitution intends to be the last word on every duty, why does it create a legislature?

Posted by: Martin Brock | Feb 4, 2008 5:42:26 PM

The legislature? Product Development. Security services are cool but confidence schemes are where the big money is.

Posted by: Randy | Feb 4, 2008 5:55:55 PM

Social Security functions the same way.

Social Security looks superficially like a pension funded by investment, but of course, it isn't. It's a transfer payment from the young to the old. As such, it is far more like the custom it actually replaced, the support of aging parents by their children. My own father and his brothers followed this custom, so it's hardly ancient.

Labor is the most productive resource, according to liberals like John Locke, Adam Smith, Ludwig von Mises and Julian Simon. Children are real means of production. Raising a child is real investment, unlike the purchase of Treasury notes and other statutory "capital", which differs little from the Social Security scheme. We are all children. There is nothing fundamentally irrational, economically, about expecting children to support parents who supported them.

But Social Security expects "the young" to support "the old". This collectivization, of the investment and its yield, is not economically rational (ratio-able, proportionate, equitable), because while we are all children, we are not all parents. We all have two parents (ideally two supportive parents), but we don't all have two children. Social Security breaks down with a declining birth rate only because the system is irrational in this way.

Rationally, some people raise children and expect some yield from this investment, the support of children laboring on family farms for example. Some people raise no children and purchase real, nonhuman means of production instead. Some people do a little of the former and little the latter. Social Security simply ignores this rational division of labor and its fruits in favor an irrational statutory system, and most reform proposals incredibly make the system even less rational.

Bush proposed to fill "private accounts" with Treasury notes "earning" interest (collected from taxpayers) guaranteed to exceed the rate of inflation. The nominally "conservative" Heritage foundation thought this idea was just dandy, especially the part about the I-Bonds! I can their paper on the proposal, if its still on the web.

So we "unburden" our children by accumulating entitlement to tax revenue? Then who do we imagine to being these taxes? There can only be two answers to this question.

1) Someone else's children pay the taxes.

2) We're delusional.

Answer 1 clearly can't apply to everyone. I don't wonder long who imagines correctly here.

Posted by: Martin Brock | Feb 4, 2008 6:11:44 PM

Security services are cool but confidence schemes are where the big money is.

Like disguising your support of your parents as your "savings". You wouldn't believe all the people who swallowed that one. We're all the Prince of Wales now. Praise the Lords.

Posted by: Martin Brock | Feb 4, 2008 6:14:05 PM

"There can only be two answers to this question."

There's a third. The political class pays back what it owes to the current generation of elderly directly by eliminating many (most) of the confidence schemes it is now running, simultaneously releasing the next generations to invest their savings as they see fit. It is true that the non-payroll taxes would have to stay in place for a few years until the debt is paid in full, but the money would be going directly to those who are owed rather than fattening the wallets of the political class as it is now, and once the debt is paid these taxes could be dramatically reduced as well.

Posted by: Randy | Feb 4, 2008 6:47:34 PM

P.S. If the above seems far fetched, consider that it is going to happen eventually, the only question is when.

Posted by: Randy | Feb 4, 2008 6:51:37 PM

Social Security could be fixed if:

- Congress lets everyone who has had funds taken from their paychecks to fund SS, but who have not yet begun to receive benefits, have the choice of opting out. This would include seniors who have not yet made claims against their SS.

- Those opting out would be allowed to take only the amount that they have contributed and place those fund in an approved retirement account. The amount the individual's employers have contributed would have to be forfeited for the opportunity to escape - self employed periods of time wouldalso have to forfeit. This is the first of the two bitter pills to swallow.

- Bonds would have to be issued (like 30 year TIPS or something that offers a REAL rate of return) to fund the deficit that those who the 'opted out' would create.

Once the individuals that opted out took possession of their funds they would have to invest in these issued bonds for an undetermined time [explained later]. In the first year only, any SS under funding, if any, would have to be made with general funds. These are the conditions of the second bitter pill.

- The interest on the bonds (those that are purchased mandatorily by the opt outers) would be funded by the payroll taxes from those who still participate in the existing SS system. And that interest would be paid by those still participating in the SS system for all subsequent years.

- People who have opted out would no longer have a specific Social Security payroll tax. More over, their employer would no longer have the Social Security payroll tax. This employer's savings could be returned to the opted out employee in increased compensation.

- Over time, the amount of savings required to be used to purchase these newly issued bonds would decrease, allowing those who opted out to have some flexibility in their investment choices.

People who opt to stay with the SS system as it is today would have to be subjected to fluctuating payroll rates to pay for the splinter system and interest on the bonds.

Posted by: lowcountryjoe | Feb 4, 2008 7:25:46 PM

LowCountryJoe,

I can see you've given it some thought, but it assumes that other government programs can't or won't be sacrificed to pay off those who are owed. I think that once people finally wake up to the fact that they are about to be screwed by the government they once trusted that they will be more than ready to cut other government programs without mercy. And I have no problem with that. It is the political class and its employees who have been profiting the most from the revenue stream. It is appropriate that they should pay the inevitable cost of ending it. And again, I think this is exactly what is going to happen. In fact, if you're still around for another 40 years or so, I'd say it is likely that you will be a witness.

Posted by: Randy | Feb 4, 2008 7:42:31 PM

There's a third. The political class pays back what it owes ...

No. That's a total non sequitur.

Posted by: Martin Brock | Feb 4, 2008 8:06:33 PM

Those opting out would be allowed to take only the amount that they have contributed and place those fund in an approved retirement account.

You obviously don't have a clue. These "amounts" don't exist anymore. Your parents ate them.

Posted by: Martin Brock | Feb 4, 2008 8:08:57 PM

Its not a non-sequitur, Martin. Like you've said many times, people think the government owes them money. They're going to demand repayment. And as soon as some future generation refuses to pay higher taxes, other programs is exactly where the repayment is going to come from.

Posted by: Randy | Feb 4, 2008 8:21:44 PM

Its not a non-sequitur, Martin.

No. It's a non sequitur.

So we "unburden" our children by accumulating entitlement to tax revenue? Then who do we imagine to being these taxes? There can only be two answers to this question.
1) Someone else's children pay the taxes.

2) We're delusional.

There's a third. The political class pays back what it owes to the current generation of elderly directly by eliminating many (most) of the confidence schemes it is now running ...

Your "third" option has nothing whatever to do with the premise. That's what "non sequitur" means.

There is nothing to pay back. You were supporting the elderly, including your parents. That's what actually happened. If your parents had bought TIPS, paying a "real" interest rate, as countryjoe suggests, you'd still be paying taxes to finance their retirement, because Congress pays off Treasury bonds by raising taxes. Get it?

Like you've said many times, people think the government owes them money.

That's right. They think so, because they're delusional. They've been conned, and they just can't get the con out of their heads.

Actually, many people understand that Social Security is elder support, not "saving for retirement", and many people accept it as such. These people are not delusional, but they still need to understand that the program is an irrational, inequitable system of redistribution.

They're going to demand repayment.

They can demand anything they like. There's nothing to repay. You can try eating your poor parents if you want. At least Jonathan Swift's solution is not a load of incredibly deceptive bullshit, unlike Dubya's.

And as soon as some future generation refuses to pay higher taxes, other programs is exactly where the repayment is going to come from.

I'm happy to withdraw from the empire and slash the military-industrial complex, if you can manage that, but this reform won't lift the burden of your parents from you, and it won't make "saving" TIPS for retirement any more rational than Social Security.

Posted by: Martin Brock | Feb 4, 2008 8:52:45 PM

"I'm happy to withdraw from the empire and slash the military-industrial complex..."

That's likely to be a large part of it, but I expect that every department will take a major hit, and that at least a few will be completely disbanded.

Posted by: Randy | Feb 4, 2008 9:10:37 PM

You obviously don't have a clue. These "amounts" don't exist anymore. Your parents ate them.

Martin,

Reading comprehension is a must in these discussions. I suggest you re-read what I wrote and specifically tell me what is not airtight instead of insisting it is me without the clue; I'll be glad to take honest criticism instead of your mouthy insults. By the way, Marin, Professor Plumb in the Ball Room, with the Candlestick.

We all know the "amounts" do not exist anymore and that's why the system has to be reformed. If half the contributions are given back in the form of bonds with anywhere from 15-30 year maturity rates, the only thing that that needs to be paid back in those 15-30 years is interest. Paying back the principal is another matter, and the still collected payroll taxes will have to pay for the principal as well. Surplus would have to be baked into the fluctuating payroll tax rates on those who stay in, and that surplus would have to be invested into real monetized assets by our government...and, since all the economic knownothings handwring over the so-called current account deficit, may I suggest that the federal government invest these surpluses in foreign assets.

But, you know what, I'd be willing to forfeit every bit of my past contributions just to escape the system. The only other thing that I'd ask for in exchange is an elimination of the caps placed on what I can annually contribute to my IRAs.

Posted by: lowcountryjoe | Feb 4, 2008 11:39:44 PM

Reading comprehension is a must in these discussions. I suggest you re-read what I wrote and specifically tell me what is not airtight instead of insisting it is me without the clue ...

This part:

Those opting out would be allowed to take only the amount that they have contributed and place those fund in an approved retirement account.

Again, there is nothing to take out. Social Security is a statist substitute for the support of aging parents by their children. Your payroll tax does not substitute for investment or extending credit. It substitutes for repaying credit. You don't get your mortgage payment back. The expectation is absurd.

The payroll taxes of the prior generation do not extend the credit. These taxes repay credit too. The credit is the support of children by their parents.

You expect to get your payroll taxes back, because Social Security collectivizes the support of the old by the young and constructs a benefit formula superficially resembling "return on investment", but expecting a "return" from elder support is economic nonsense. We get returns from raising children and other genuine investments. Elder support is this return, not another investment.

But, you know what, I'd be willing to forfeit every bit of my past contributions just to escape the system. The only other thing that I'd ask for in exchange is an elimination of the caps placed on what I can annually contribute to my IRAs.

I favor eliminating caps on your IRA contributions in exchange for marginal income tax rates, which you may avoid with the IRA. This reform is called a progressive consumption tax.

I don't favor ending your obligation to support parents who supported you, but I do favor ending the collectivization. We shouldn't pretend to "save" while supporting our elders and then demand that children generally support us as though our elder support had been investment. This pretense is incredibly irrational. We should just support our parents and expect nothing in return for it. They supported us, and we're doing the returning.

http://www.knology.net/~marbrock/psupp.htm

Listen to the latest EconTalk (www.econtalk.org), and you'll hear Russ Roberts say the following around 42 minutes and 45 seconds into the podcast.

"It's really better to take care of your grandmother than for your grandmother to get a check in the mail ..."

He may correct me if I'm wrong, but I suppose Roberts refers to Social Security here.

Posted by: Martin Brock | Feb 5, 2008 12:18:05 AM

I favor eliminating caps on your IRA contributions in exchange for higher marginal income tax rates, which you may avoid with the IRA.

Posted by: Martin Brock | Feb 5, 2008 12:20:02 AM

Martin apparently believes that the US Constitution grants the legislature the right to enslave us at the state level.

Posted by: FreedomLover | Feb 5, 2008 1:13:46 AM

Freedomlover apparently believes that puppies should be brutally beaten to death.

Posted by: Martin Brock | Feb 5, 2008 1:19:49 AM

You don't get your mortgage payment back. The expectation is absurd.

No, of course you don't get mortgage payments back. But, if you pay your 30 year note back to the bank as scheduled (and do not refinance or take out an equity line of credit), you own a real asset that can be sold in the market. That's not absurd, is it?

Well, if you favor it and there's enough people who feel the same way as you do, you just do not opt out. You stay in the scheme.

Posted by: LowcountryJoe | Feb 5, 2008 6:18:37 AM

No, of course you don't get mortgage payments back. But, if you pay your 30 year note back to the bank as scheduled (and do not refinance or take out an equity line of credit), you own a real asset that can be sold in the market. That's not absurd, is it?

No, it's not. You are the asset your parents' built, and you do own this valuable asset, but you don't get to own the asset and pretend that paying for it is "saving" at the same time.

Well, if you favor it and there's enough people who feel the same way as you do, you just do not opt out. You stay in the scheme.

I don't want to stay in the Social Security scheme. I want to support my parents and also support my children and prepare for an able bodied retirement as described in the link. I do not want to support my parents and your parents too while you divert your parents' support to your own consumption.

Posted by: Martin Brock | Feb 5, 2008 8:16:13 AM

Martin,

We get it, really. You think that social security is the repayment of a debt. But then, everybody else thinks of it as a savings plan, and more importantly, the government has encouraged people to think of it as a savings plan. They send me a statement every year telling me how much I can expect to collect. In other words, what we have is a contract. Okay, perhaps not a contract, but a whole lot closer to a contract than your assertion that it is a debt. Like I said, people are going to demand, yes demand, that their savings be returned. Indeed, they'll probably demand a high rate of return, and they won't give a damn if the whole rest of the government has to be disbanded in order to get it. Whatever their intent, the folks who designed this monstrosity should have seen this coming, and I just think its hilarious that they didn't. Whatever, its not my problem, and I'm kind of looking forward to the opportunity to downsize the government.

Posted by: Randy | Feb 5, 2008 9:05:33 AM

We get it, really. You think that social security is the repayment of a debt.

I think that raising children is an investment, because it really is. I think that supporting the elderly is not an investment, because it really isn't.

But then, everybody else thinks of it as a savings plan, and more importantly, the government has encouraged people to think of it as a savings plan.

Right. Expecting the government now to transform the deception into reality seems odd to me.

They send me a statement every year telling me how much I can expect to collect. In other words, what we have is a contract.

It's not a contract, because there was no agreement. It's an institution.

Okay, perhaps not a contract, but a whole lot closer to a contract than your assertion that it is a debt.

It's a debt that a previous generation imposed on you. It's not remotely like a contract. Parents expecting the children they support to support them in turn is a reasonable institution. The paternalistic state coopts this propriety for its own purposes. If we get Clinton, I suppose we should check our sexism and say "maternalistic state". We could say "parentalistic state", but I'd like to preserve "parentalism" for something else.

Like I said, people are going to demand, yes demand, that their savings be returned.

They can demand, yes demand, that all of their taxes be returned, but it won't happen, because it can't happen. Things that can't last, don't. Things that are too good to be true are false. It ain't rocket science.

People demand Social Security benefits as promised, because you and your partisans persuade them that they have the benefits coming to them. Bushniks similarly sell the Congressional authority to raise taxes and persuade the buyers that they have the taxes coming to them, but tax revenue doesn't fall like manna from heaven, even if the Bushniks tell you so. People pay taxes.

Indeed, they'll probably demand a high rate of return, and they won't give a damn if the whole rest of the government has to be disbanded in order to get it.

Here's an interesting proposition. We demand a high "rate of return" from the government, and we disband the government to get it. How is that supposed to work again?

Whatever their intent, the folks who designed this monstrosity should have seen this coming, and I just think its hilarious that they didn't.

Some did. I've quoted Murray Latimer for you. He saw it coming in 1935.

Whatever, its not my problem, and I'm kind of looking forward to the opportunity to downsize the government.

It is your problem insofar as you're subject to the payroll tax and expect Social Security benefits while also supporting your children and meeting your other obligations. If you're entitled to lots of other rents, like Dubya and his partisans, you might not want to disband the government. You might want to expand it to expand the rents instead. So it goes, on and on, generation after generation.

Posted by: Martin Brock | Feb 5, 2008 10:57:04 AM

Martin,

"It's a debt that a previous generation imposed on you."

Screw 'em. They're all dead or dying.

"We demand a high "rate of return" from the government, and we disband the government to get it. How is that supposed to work again?"

The funds collected from non-payroll taxes go directly to those who are owed instead of to the political class. When the debt is paid in full, probably within two or three decades, the payments stop entirely. In return, the first generation is released from payroll taxes immediately and eventually from a large percentage of non-payroll taxes. The second generation is free of debt entirely and can fund the current operations of government that they still desire from current revenues.

"It is your problem insofar as you're subject to the payroll tax and expect Social Security benefits while also supporting your children and meeting your other obligations."

I'm not subject to the payroll tax for much longer. Its almost my time to start collecting. I advise the generations that follow to refuse to pay more and to insist that government be downsized instead. But if they choose to "save social security" by paying higher payroll taxes instead, well, that's their choice, but following bad leaders is a bad idea, and they will deserve the consequences.

Posted by: Randy | Feb 5, 2008 11:35:26 AM

Screw 'em. They're all dead or dying.

Exactly. And they've eaten all of your payroll taxes.

The funds collected from non-payroll taxes go directly to those who are owed instead of to the political class.

That's the idea behind the "trust fund", but your taxpaying children still support you in this scenario. You understand that. Right? Your children also support wealthier people who never supported your children, or any other children, even better than they support you. Why would you want that? Why would your children want it?

When the debt is paid in full, probably within two or three decades, the payments stop entirely. In return, the first generation is released from payroll taxes immediately and eventually from a large percentage of non-payroll taxes. The second generation is free of debt entirely and can fund the current operations of government that they still desire from current revenues.

Do the math. What you propose here doesn't remotely add up. It's just a lot of vague handwaving by which you disguise the burden you would impose on your children.

I'm not subject to the payroll tax for much longer. Its almost my time to start collecting. I advise the generations that follow to refuse to pay more and to insist that government be downsized instead.

When the generations following refuse to pay more, you'll receive less. Pretending that no taxes pay the "returns" on Treasury notes doesn't alter reality.

But if they choose to "save social security" by paying higher payroll taxes instead, well, that's their choice, but following bad leaders is a bad idea, and they will deserve the consequences.

Higher payroll taxes are not part of the plan. Higher incomes taxes are. That's the "trust fund". You won't pay payroll taxes on your Social Security benefits, but you will pay income taxes.

Funny how you seem to think you deserve beneficial consequences after following leaders who raised your payroll tax rate repeatedly.

Maybe the children of this generation will just decide that they don't want to pay any taxes funneled to you in any form. After all, that's what you say you want. Maybe they'll do you as you say and not as you do. Isn't that a frightening thought ...

I support some sort of institutionalized parental support, because people need to prepare systematically for the obligation; however, if I had to choose between keeping the current system indefinitely and simply scrapping it entirely, without any more honest and rational institution replacing it, I'd choose the latter. You would then receive nothing from the system, and I think that's fine, because you should receive nothing in my way of thinking. You should expect this support from the people you supported instead. That's mutualism. Genuine insurance is mutualism too, but Social Security is far from a genuine program of insurance.

Posted by: Martin Brock | Feb 5, 2008 12:09:31 PM

Martin,

"That's the idea behind the "trust fund", but your taxpaying children still support you in this scenario. You understand that. Right?"

Only if they want to. They vote to eliminate the payroll tax and to repay outstanding debts from general revenue. This in effect forces the political class to repay the debt as it is they who will lose their jobs and their patronage checks (I hear there's a shortage of agricultural workers which is work that even these scaliwags could probably learn). But if my children also choose to simply default on the debts of the political class, that's fine with me. My generation had a duty to end the confidence schemes but didn't, so we deserve the consequences.

"What you propose here doesn't remotely add up."

It adds up - unless you assume that government services have value to anyone other than the political class - which I do not. Most government programs are passed by a small majority and are intended to benefit the political class at the expense of everyone else. So the whole point is to make the political class repay the debt. They can pick apples.

"Higher payroll taxes are not part of the plan. Higher incomes taxes are."

Again, I advise them to refuse to pay. Its all one confidence game designed for the benefit of the political class. Cut them off.

"Maybe the children of this generation will just decide that they don't want to pay any taxes funneled to you in any form."

Good for them. Doing what's best for their children's future is their duty.

"Isn't that a frightening thought ..."

Yes, but I came to terms with the fact that death is a part of life when I was about twelve. I've lived. Its their turn.

"You would then receive nothing from the system, and I think t

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