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  1. #61
    Senior Member tinker683's Avatar
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    Just a quick question from a lay-person: When does it end? At what exact figure or number do we, as a country, final say, "OK, we've borrowed waaaay too much fucking money, we need to start thinking about how we're going to pay all this shit off" or something to that effect?
    "The man who is swimming against the stream knows the strength of it."
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  2. #62
    The Eighth Colour Octarine's Avatar
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    Quote Originally Posted by reason View Post
    The problem is that the extremely rich consume such a tiny fraction of their total income that they will die well before a marginal increase in tax rates impacts their consumption.
    OK.

    Quote Originally Posted by reason View Post
    Another way of saying this is that when the government tries to tax the extremely wealthy, the extremely wealthy continue to finance their desired levels of consumption by reducing their asset holdings.
    Wait, what?

    Or paradoxically(?) they could make their business more profitable to make up the shortfall.

    The problem is that the economy is not zero sum. An argument could still be made about incentives or purely on the idea that capital is more productively employed in private markets, in terms of total production (which was an unstated assumption in your argument). But in a democracy, we aren't interested in maximising total production, but rather trying to appease the voting masses. Which begs the question: why do we develop democracies in the first place?

    Quote Originally Posted by tinker683 View Post
    Just a quick question from a lay-person: When does it end? At what exact figure or number do we, as a country, final say, "OK, we've borrowed waaaay too much fucking money, we need to start thinking about how we're going to pay all this shit off" or something to that effect?
    Probably after the foreigners threaten war to get their money back.

  3. #63
    Senior Member reason's Avatar
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    tinker683,

    Technically, the U.S. Government can operate with ever increasing debts indefinitely without reneging on its obligations, because economic growth can increase tax revenues proportionally. Moreover, just as for individuals, it is sometimes better for governments finance current spending with debt than from tax revenues. For example, right now, the U.S. Government can effectively borrow at negative interest rates. That is, in real terms, they can borrow a $1.00 today and pay back $0.99 in a few months; it's as though T-bill holders have started volunteering to pay taxes on behalf of everyone else. But this situation will come to an end eventually.

    The U.S. Government has to, at least, reduce the rate of increase in its spending. The current budget deficit (revenues - spending for the year) is about the same size as the entire budget when George W. Bush was sworn into office. The wars in Iraq and Afghanistan bear some blame for that, but rapid and unsustainable increases in entitlement are also a major problem. This cannot continue, but the U.S. Government nonetheless keeps making promises to various groups that it will continue as though reality were not a relevant concern. Shit will hit the fan. The recession has brought forward the day of reckoning, but it was always going to happen.
    A criticism that can be brought against everything ought not to be brought against anything.

  4. #64
    Dreaming the life onemoretime's Avatar
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    Quote Originally Posted by reason View Post
    The extremely rich cannot be taxed. I don't mean they exploit accounting loopholes or flee to tax havens. Though that occurs, it is not why the extremely rich cannot be taxed. Here is a quick proof.

    (1) The purpose of production is consumption.
    (2) Production is equal to income.
    Therefore,
    (3) Income is equal to consumption in the long run.

    From this result, we get

    (3) Income is equal to consumption in the long run
    Therefore,
    (4) An income tax must reduce long run consumption.

    The problem is that the extremely rich consume such a tiny fraction of their total income that they will die well before a marginal increase in tax rates impacts their consumption. Even their children, grandchildren, and great-grandchildren will be immune to the tax. Any reduction in consumption will come in the far flung future to distant relatives. However, the extremely rich aren't motivated to reduce their own consumption today so that descendants 100 years from now might have a slightly more consumption, and so they don't. The extremely rich are effectively untaxable unless the government just starts confiscating all their assets.

    Another way of saying this is that when the government tries to tax the extremely wealthy, the extremely wealthy continue to finance their desired levels of consumption by reducing their asset holdings. Since their asset holding are so tremendously large, they can be used to finance consumption for the rest of their lives, and the lives of their children, and their children's children.

    The immediate consequence is that total savings in society falls, since the extremely wealthy are also the biggest savers. This reduces the stock of available capital and pushes up interest rates, slowing economic growth and making it more costly to borrow. Since the poor benefit most from economic growth and low interest rates, it is the poor who actually bear the burden of the tax.

    While the government can't tax the extremely wealthy, the resources the government acquires by taxation must be drawn away from other uses, and those other uses tend to increase the well-being of all members of society, especially the poor.
    This is why an extremely heavy estate tax, essentially maximizing an upper limit to the amount of assets a person can receive as an heir (I'd suggest around $2-5 million a person), is absolutely vital to the healthy functioning of a pluralistic society.

  5. #65
    null Jonny's Avatar
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    Quote Originally Posted by reason View Post
    The extremely rich cannot be taxed. I don't mean they exploit accounting loopholes or flee to tax havens. Though that occurs, it is not why the extremely rich cannot be taxed. Here is a quick proof.

    (1) The purpose of production is consumption.
    (2) Production is equal to income.
    Therefore,
    (3) Income is equal to consumption in the long run.

    From this result, we get

    (3) Income is equal to consumption in the long run
    Therefore,
    (4) An income tax must reduce long run consumption.

    The problem is that the extremely rich consume such a tiny fraction of their total income that they will die well before a marginal increase in tax rates impacts their consumption. Even their children, grandchildren, and great-grandchildren will be immune to the tax. Any reduction in consumption will come in the far flung future to distant relatives. However, the extremely rich aren't motivated to reduce their own consumption today so that descendants 100 years from now might have a slightly more consumption, and so they don't. The extremely rich are effectively untaxable unless the government just starts confiscating all their assets.

    Another way of saying this is that when the government tries to tax the extremely wealthy, the extremely wealthy continue to finance their desired levels of consumption by reducing their asset holdings. Since their asset holding are so tremendously large, they can be used to finance consumption for the rest of their lives, and the lives of their children, and their children's children.

    The immediate consequence is that total savings in society falls, since the extremely wealthy are also the biggest savers. This reduces the stock of available capital and pushes up interest rates, slowing economic growth and making it more costly to borrow. Since the poor benefit most from economic growth and low interest rates, it is the poor who actually bear the burden of the tax.

    While the government can't tax the extremely wealthy, the resources the government acquires by taxation must be drawn away from other uses, and those other uses tend to increase the well-being of all members of society, especially the poor.

    I'm not sure where you're getting this information from, but my understanding is this:

    Y = b + p(Y-T) + I + G

    Y = output
    b = baseline consumption (what people would consume if baseline income were zero)
    p = propensity to consume (the fraction of additional wealth consumed as opposed to saved)
    T = taxes
    I = investment
    G = government spending

    Solving for Y we see that Y = 1/(1-p) * [b + I + G - pT].

    Now, let us look specifically at your hypothetical population of extremely wealthy individuals. You make the assumption that these individuals would spend the same amount of money regardless of taxation, which means that p=0. Therefore, because taxing them would have no effect on their consumption, it would not diminish short run production to tax them. However, taxing them would increase government spending by the amount taxed. Applying that increase in government spending to the output equation for the entire population (remember, p=0 for the rich, so increasing their taxes would mean that Y decreased by pT/[1-p]=0T[1-0]=0) we see that since the taxes for the rest of the population were not increased, all they experience is an increase in government spending.

    So, the overall output increase in the economy is

    ∆Y = ∆G/(1-p)

    and since p for the rest of the population is greater than zero, then ∆Y > ∆G. This means that you get a proportionally greater increase in output than what is taxed from the rich.

    Now, you've suggested that this will result in an increase in interest rates because the wealthy are such a large proportion of savers, and the money supply would likely shrink as a result of their need to dip into their savings (Basically, you are suggesting that 'I' in the equation above will decrease). However, you leave out the fact that the government has monetary policy at their disposal, and thus has the ability to adjust interest rates accordingly; the government regularly coordinates monetary and fiscal policy at the same time to facilitate their objectives. Do you have anything to say on this?
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  6. #66

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    Quote Originally Posted by mmhmm View Post
    <details of removing FICA tax and adding a tax bracket>
    This is intereting. I think the principle is still sound, but some of the facts you mentioned seem contradictory to each other. Is the FICA tax 7.65% for both employees and employers or something lower now? You mentioned they were reduced, but kept using 7.65%.

    Quote Originally Posted by reason View Post
    (1) The purpose of production is consumption.
    (2) Production is equal to income.
    Therefore,
    (3) Income is equal to consumption in the long run.

    From this result, we get

    (3) Income is equal to consumption in the long run
    Therefore,
    (4) An income tax must reduce long run consumption.
    Both the steps from (1)+(2) to (3) and the step from (3) to (4) seem like leaps. Would you mind filling in the details of the proof? I think it would be hard to do any such proof without equations.

    Quote Originally Posted by tinker683 View Post
    Just a quick question from a lay-person: When does it end? At what exact figure or number do we, as a country, final say, "OK, we've borrowed waaaay too much fucking money, we need to start thinking about how we're going to pay all this shit off" or something to that effect?
    I am uncertain about the details of the accounting. But the U.S. has a really good credit rating (so far). What is being done is a little like using one credit card to pay off another, except that the transfer rate isn't expensive for the U.S because of it's really good credit (the U.S. has never defaulted, and has never come this close to doing so).

    Like Reason was saying, it's almost like getting money for a discount when you take into account the time value of money (getting an amount of money now is worth more than getting that amount in the future).

    So, it is not entirely foolish to borrow. Actually, many business schools, teach having a particular amount of debt for leverage to out-compete your competition. But this requires getting an interest rate on your debt less than your "internal rate of return"(How much your money grows with time based on your business). Your credit rating determines how low an interest rate you can have...so it is of paramount importance to have a good credit rating.

    Quote Originally Posted by Jonnyboy View Post
    Now, you've suggested that this will result in an increase in interest rates because the wealthy are such a large proportion of savers, and the money supply would likely shrink as a result of their need to dip into their savings (Basically, you are suggesting that 'I' in the equation above will decrease). However, you leave out the fact that the government has monetary policy at their disposal, and thus has the ability to adjust interest rates accordingly; the government regularly coordinates monetary and fiscal policy at the same time to facilitate their objectives. Do you have anything to say on this?
    With the base interest rates set by the fed at near zero, do they really still have that ability?

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  7. #67
    null Jonny's Avatar
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    Quote Originally Posted by ygolo View Post

    With the base interest rates set by the fed at near zero, do they really still have that ability?
    Yes, at least to the extend that they can offset any changes in interest rates due to decreased savings. What reason is suggesting is that the interest rates will be driven up by the decrease in savings from the wealthy, but an inflow of monies from the central bank will drive interest rates back down and essentially offset the decrease in savings. There is a notion in Keynesian economics that once interest rates reach a particularly low level that the effects of monetary policy in stimulating the economy are nil (the liquidity trap), but what this is essentially saying is that as interest rates i approach zero, the change in investment I with respect to i approaches zero. So dI/di < 0 and the lim dI/di as i->0 is 0.
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  8. #68
    Senior Member tinker683's Avatar
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    Quote Originally Posted by reason View Post
    tinker683,

    Technically, the U.S. Government can operate with ever increasing debts indefinitely without reneging on its obligations, because economic growth can increase tax revenues proportionally. Moreover, just as for individuals, it is sometimes better for governments finance current spending with debt than from tax revenues. For example, right now, the U.S. Government can effectively borrow at negative interest rates. That is, in real terms, they can borrow a $1.00 today and pay back $0.99 in a few months; it's as though T-bill holders have started volunteering to pay taxes on behalf of everyone else. But this situation will come to an end eventually.

    The U.S. Government has to, at least, reduce the rate of increase in its spending. The current budget deficit (revenues - spending for the year) is about the same size as the entire budget when George W. Bush was sworn into office. The wars in Iraq and Afghanistan bear some blame for that, but rapid and unsustainable increases in entitlement are also a major problem. This cannot continue, but the U.S. Government nonetheless keeps making promises to various groups that it will continue as though reality were not a relevant concern. Shit will hit the fan. The recession has brought forward the day of reckoning, but it was always going to happen.

    Quote Originally Posted by ygolo View Post
    I am uncertain about the details of the accounting. But the U.S. has a really good credit rating (so far). What is being done is a little like using one credit card to pay off another, except that the transfer rate isn't expensive for the U.S because of it's really good credit (the U.S. has never defaulted, and has never come this close to doing so).

    Like Reason was saying, it's almost like getting money for a discount when you take into account the time value of money (getting an amount of money now is worth more than getting that amount in the future).

    So, it is not entirely foolish to borrow. Actually, many business schools, teach having a particular amount of debt for leverage to out-compete your competition. But this requires getting an interest rate on your debt less than your "internal rate of return"(How much your money grows with time based on your business). Your credit rating determines how low an interest rate you can have...so it is of paramount importance to have a good credit rating.
    Thank you both for your posts! I'm no economics major, I'm just your average guy I suppose when it comes to this sort of stuff and as such I tend to look at things like this much as I would my own business and how I'd manage my own funds.

    Reading your posts remind me of a discussion I had a Republican friend of mine back when the Iraq had just gotten underway. I had asked him about how the administration was paying for the wars and he told me that essentially it was as if they were paying one loan off with another but that other countries would ALWAYS loan to us (or something or that effect. It was years ago). Your posts seem to echo what he told me back then.

    This to me seems inherently unsustainable. I mean, it just seems to me that at some point the loans or whatever we're going are going to get so colossally massive that we won't have any hope of paying them back if others should decide to stop loaning to us. Which also brings up another question I have: How much of our economy is self-produced (as in, we produce the monies ourselves) and how much of it is dependent on foreign loans? If most of it is dependent on foreign loans...then how much can we, as a country, really say that we are our own country?

    I don't expect any of you to answer this, I'm just thinking out loud and I realize these are very big questions with very big answers.

    I guess I'm glad my country has a good credit rating but I do wonder...what's it going to take to weaken that credit rating and how quickly are we approaching that point? Once we get to that point...what happens then?

    This whole thing really worries me as a citizen because it seems to me like our guys and gals on Capitol Hill don't seem to really know what the hell they're doing. I'm hoping to raise a family someday and I don't mean to sound alarmist but I'm just worried what kind of future I'm going to have to prepare for.
    "The man who is swimming against the stream knows the strength of it."
    ― Woodrow Wilson

  9. #69
    The Eighth Colour Octarine's Avatar
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    Quote Originally Posted by tinker683 View Post
    If most of it is dependent on foreign loans...then how much can we, as a country, really say that we are our own country?
    Does it matter who loans to you, so long as they don't have unreasonable demands and you have the capacity to pay it back?

  10. #70
    Senior Member Survive & Stay Free's Avatar
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    Quote Originally Posted by ygolo View Post
    I think the Democrats need to compromise on social security.

    I also think the Republicans need to compromise on taxes for the extremely rich.

    Opinions?
    What's to compromise? The US pays shit all social security out to its citizens as it is, you guys work harder and longer, have less days off/public holidays, earn less in wages and pay higher bills as it is but you want that situation to worsen?

    So far as taxes on the rich go, again, the US doesnt tax the rich at all, perhaps some of the money which would have been redistributed through taxing and spending is redistributed anyway through private employee benefits but I'm unsure that taxation would effect that that much.

    This is a very good example of globalisation requiring harmonisation between states, I cant see the US making the necessary adjustments and the whole of the world's economic system is threatened as a consequence.

    The neo-liberal revolutionaries who determine the world economic agenda want collapse and catastrophe, just as much as the marxists before them wanted it, they imagine that the collapse will permit them to try out their favourite theories and see their ideology in practice. Anyone with any doubts can go to hell.

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