What is "fair" when it comes to rich people and taxes?

[_EAllusion]

We are now running perilously close, relatively speaking, to a skeleton crew military that is recklessly underfunded, undermanned, and degraded in its ability to project power given present and realistic future threats.

The US spends almost half of the entire world's military budget by itself. The next closest nation spends about 1/7th of the US, and almost all of the other spenders of note are close US allies (UK, Japan, France, Germany, etc.)

US military spending is comparable to where it was at the height of the cold war when it was at war with the second most powerful military on earth. Its Navy is more powerful than the rest of the world combined. The US owns a fleet of nuclear weapons that make serious existential threat impossible.

This, in Droopy's mind, equates to a dangerously underfunded skeleton crew. Why, because he's worried the US won't be able to project power into enough theaters with that kind of military. Tells you how much "power" he wants to "project" on the world, doesn't it?

[_Analytics]

People will still consume. Only, they would hopefully do it with money that they have saved for that purpose. They would also hopefully be increasing their wealth with money that they invested. Obviously, the flip-side of saving and investing is borrowing on credit.

The problem is that saving/investing and borrowing are tied to each other; there needs to be an equilibrium. And this equilibrium is naturally brought about by interest rates. Greater savings leads to lower interest rates (to encourage borrowing), and lesser savings leads to higher interest rates (there is less to "borrow").

If interest rates were allowed to fluctuate naturally, then the process would work ideally (and fairly!) … But since interest rates are manipulated by a central bank, the market is thrown out of balance to the benefit of some and the disadvantage of others.

Consumption from savings is good. Consumption from borrowed money can be good (wise investment and growth), or it can be disastrous (housing market 2003-2007). If the market is allowed to manage the consequences of wise borrowing (and lending) and foolish borrowing (and lending), then things can stay in balance. If the market is distorted, then all bets are off.

The main engine of the housing bubble was the free-market decision of consumers to borrow as much money as possible to purchase houses, and the free-market decisions of savers to invest in the free-market products of mortgage-backed securities backed by sub-prime mortgages. The free-market correction to this was the housing market crash, along with the bankruptcy of the free-market lenders and other free-market players, including Bear Stearns, Lehman Brothers, and AIG. It’s impossible to know what would have happened had the government not stepped in when it did, but most experts believe that the results would have been disastrous. Because of this, I find your position that free-markets necessarily lead to balance as a bit naïve.

But getting back to my main point, what would be happening in the economy if the government wasn’t distorting interest rates? Interest rates would be a little higher. That would result in companies borrowing less to invest in capital improvements. People would borrow less to purchase homes and cars. Would the economy be better off if companies were investing less and people were spending less? How so?

[_cinepro]

The main engine of the housing bubble was the free-market decision of consumers to borrow as much money as possible to purchase houses,

I disagree. You're only looking at one side of the coin.

If we are going to blame the consumers who borrowed the money, we must also blame the lenders who made the bad loans. I blame both, and neither were working in a "free market".

The housing market was severely distorted by government intervention via lower interest rates and guaranteeing the bad loans through Fannie Mae and Freddie Mac. Not to mention that Fannie Mae and Freddie Mac were huge into bundling and selling the Mortgage Backed Securities that were feeding the housing bubble.

At every step of the way, you have the government doing everything they can to inflate the housing bubble (both Democrats and Republicans), and then doing everything they can to stop it from deflating (both Democrats and Republicans). This is the exact opposite of a "free market".

There were even instances of local cities and states consumer groups and politicians seeing the danger in the sub-prime loans, and the Federal Government actually stepped in at the request of the banks to prevent them from acting to slow things down!

Certainly there were free market elements involved in the bubble, and it's very possible to have bubbles in free markets, but the real estate bubble was only possible with heavy government intervention. It would have ended far sooner, and been much smaller, without the government getting involved.

For a good overview on all the players involved, I recommend the book "All the Devils are Here"

and the free-market decisions of savers to invest in the free-market products of mortgage-backed securities backed by sub-prime mortgages. The free-market correction to this was the housing market crash, along with the bankruptcy of the free-market lenders and other free-market players, including Bear Stearns, Lehman Brothers, and AIG.

You've left out the Fed and Fannie Mae and Freddie Mac. They were very, very important gears in the machine that helped the bubble grow bigger, and last longer, than it otherwise would have.

There is also the sad fact that in order for it to be a "free market", the losers would have to take their losses. We can argue about whether or not it was a good thing for the government to transfer the losses to the tax payers, but the fact that it happened means it wasn't a "free market" by any definition.

People look back at the real estate bubble and think "wow, you had janitors buying million-dollar mansions. That was insane!" But we don't realize that things are still just as insane! For example, the Federal Reserve is currently, as we speak, printing money and using that newly created money to buy Mortgage Backed Securities! People are getting home loans right now, and those loans are ultimately being paid for with money that is created out of thin air by the Fed!

http://buzz.money.cnn.com/2012/09/13/fed-mbs-qe3/

So even today, the housing market is not a "market" at all. It is a government program set up to transfer government-created money to banks and home builders on behalf of people who want to pay a mortgage instead of renting. Lenders are not lending their own money, they are only the middlemen between this newly created money and people who want to buy homes.

It’s impossible to know what would have happened had the government not stepped in when it did, but most experts believe that the results would have been disastrous. Because of this, I find your position that free-markets necessarily lead to balance as a bit naïve.

As I said above, the housing crash wasn't a "free market" problem with a government solution. It was a "market" and "government" problem with a market and government solution. I think too much "government" and not enough "market" for the solution.

That being said, I think the predictions of doom are a little overstated, and while it would have been messy and more acutely painful, a totally free-market solution would have been much, much "fairer", with the costs and the pain being most felt by those who were most responsible. The business system is set up to deal with failure "fairly" (look at Lehman Brothers), and it's only to the degree that the government got involved that the pain was spread to people that weren't directly involved (i.e. all taxpayers). This also goes for foreclosures and individual mortgages. The banks and individual borrowers should have also been made responsible for their actions through the mechanisms that had been set up (and successfully dealing with such problems for decades).

Yes, it would have been "painful", but it would have been much more "fair", and a lot quicker.

But getting back to my main point, what would be happening in the economy if the government wasn’t distorting interest rates? Interest rates would be a little higher. That would result in companies borrowing less to invest in capital improvements. People would borrow less to purchase homes and cars. Would the economy be better off if companies were investing less and people were spending less? How so?

The question is whether or not a "dollar" is worth anything. Does having "money" actually mean anything? Is there a limit on what "money" can do?

Ultimately, the answer is that "money" (i.e. "dollars" for us in the US) isn't limitless. It has to be a reflection of the allocation of resources. Money has to be a useful indicator for people to make decisions.

For example, a family needs to be able to use their money as a reliable indicator of their "resources". Let's say a family wants to buy a $500k house, a new $25k Honda Accord, and go on a $12k Disney Cruise. But they only have $250k in the bank. That money serves as an indicator of the resources they have "saved" over the years, and now they must figure out what they should do with it. They need to decide whether borrowing money for a new house or car is a good use of their resources (and future resources), and whether a vacation is what they want to do. The current government interference in the economy is nothing more than an attempt to try and make people think that they can do more with their limited resources/money than they actually can or should, with current and future tax payers making up the difference through national debt and inflation. This isn't a good thing for an economy; it's nothing more than smoke an mirrors.

In other words, we are trying to have "too much" stuff, and 50 years from now our children's children will be paying for the mortgages, college and health care that we're trying to pay for today with the government's help. The government is distorting the value of our money, and eventually someone is going to have to make up the difference. There aren't enough rich people in the country to do it, so it's either going to fall to the rest of the existing tax-payers through higher taxes, everybody through inflation, or future generations through debt.

Take your pick, but I don't see how any of those are preferable to living in reality now.

[_Analytics]

I disagree. You're only looking at one side of the coin.

If we are going to blame the consumers who borrowed the money, we must also blame the lenders who made the bad loans. I blame both, and neither were working in a "free market".

Dude! In one sentence I said the problem was caused by the borrowers and lenders, and you literally snipped the sentence in half and criticize me for not saying what I did in fact say in the second half of the sentence!

The housing market was severely distorted by government intervention via lower interest rates and guaranteeing the bad loans through Fannie Mae and Freddie Mac. Not to mention that Fannie Mae and Freddie Mac were huge into bundling and selling the Mortgage Backed Securities that were feeding the housing bubble.

At every step of the way, you have the government doing everything they can to inflate the housing bubble (both Democrats and Republicans), and then doing everything they can to stop it from deflating (both Democrats and Republicans). This is the exact opposite of a "free market".

I agree that the Fed, the GSA’s, and the government played a role, but look at the roles of free-market forces. Private investors proved quite thrilled to purchase Nonagency CMOS (i.e. purchase loans that were bundled by investment banks without any involvement of GSAs). The very worst mortgages were securitized by investment banks, not the GSAs. The credit-rating agencies that gave the Nonagency CMOS AAA ratings were also unaffiliated with the government. So sure, the GSA’s tried to stay relevant by lowering their standards to compete with the investment banks, but the fundamental supply and demand for crappy mortgages existed in its entirety without the government there.

There were even instances of local cities and states consumer groups and politicians seeing the danger in the sub-prime loans, and the Federal Government actually stepped in at the request of the banks to prevent them from acting to slow things down!

If you believe in the free market, why should “local cities and states consumer groups and politicians” have any right to prevent the free-market transactions of home buyers, mortgage brokers, investment bankers, and investors?

That being said, I think the predictions of doom are a little overstated, and while it would have been messy and more acutely painful, a totally free-market solution would have been much, much "fairer", with the costs and the pain being most felt by those who were most responsible.

With our without government intervention, the system was rigged so that the investment bankers get the upside benefit and society as a whole takes the downside risk. The only question the government faced is what could be done to mitigate the cost to society as a whole—take interventions to prevent a global depression, or don’t take interventions and let the world fall into a depression. Most economists agree that the cost to society of not intervening was less than the cost of intervention and thus was the less unfair reaction.

That said, I’m totally in favor of reforming the system so companies can fail without systematic risk.

The question is whether or not a "dollar" is worth anything. Does having "money" actually mean anything?

You can purchase the book Dollars Have No Value on Amazon.com for $24.99.

Ultimately, the answer is that "money" (i.e. "dollars" for us in the US) isn't limitless. It has to be a reflection of the allocation of resources. Money has to be a useful indicator for people to make decisions.

For example, a family needs to be able to use their money as a reliable indicator of their "resources". Let's say a family wants to buy a $500k house, a new $25k Honda Accord, and go on a $12k Disney Cruise. But they only have $250k in the bank. That money serves as an indicator of the resources they have "saved" over the years…

Have you read The Return of Depression Economics by Paul Krugman? I’d be interested in your counter-argument to the point he illustrates with the baby sitting co-op. I think that what’s ultimately most important is people actually having jobs and the economy remaining productive. Whether $100 now is worth $200 in the future (because its value grows with interest) or is only worth $50 (because it is hammered with inflation) is driven by the supply and demand for money at different points in time and across time.

The most fundamental problem with the economy right now is that everybody wants to work, pay off their debts, and save, and not enough people want to buy stuff and go into debt. The result of this imbalance is high unemployment. If everybody wants to spend the money they earn today 20 years from now, the time-value of money ought to be adjusted to incite more people to spend today.

[_Droopy]

Droopy -

Why is it not more fair to charge every American the same flat fee as a tax instead of a flat tax rate? Mitt Romney pays 20k a year or whatever and so does Joe Blow in Everytown, USA. What isn't that even better? After all, everyone pays an equal amount, so isn't that the most fair of all?

The question isn't ultimately about what is "fair." The fair tax is needlessly complex, would suddenly create a massive inflation of general prices across the economy (for a net gain of purchasing power to consumers of probably, for all intents, zero - or worse), and this 23% sudden tax increase on all purchases would be piled on top of numerous other state sales and other taxes that would remain unchanged.

The worst of it, however, is that unlike the abolition of the entire United States tax code and moving to a single, flat rate which would require a super majority to alter, the fair tax actually makes in easier for congress to raise taxes in the future.

The original legislation would initiate a 23% rate, but then measure that rate in each future year according to a combination of the general revenue rate, the old-age, survivors and disability insurance rate; and the hospital insurance rate. So the rate will be open to adjustment each year, and it won't take long for Congress to begin pressuring it upward across any of the three areas.

I'm not so much interested in what is "fair" (as this isn't even a logically or economically meaningful concept when applied to rates of taxation except in the most extreme theoretical or conceptual circumstances) as in what works and what creates the most wealth for the most people across all relative economic levels. I'm not going to really be concerned if Mitt Romney is paying a somewhat smaller rate of taxation then I am so long as I'm doing well and the future is bright and there is plenty of opportunity to move upward, economically, according to my own talents and abilities. Mitt Romney's wealth and tax rate really isn't any of my business, or is his tax rate in any way causally connected to my success.

In theory, some of the poor and the lower working classes would see their taxes go up a bit under a flat tax. However, this is easily dealt with. In the Forbes version of the flat tax, for example, the requirement to pay federal income taxes for a family of four doesn't even begin until after the $36,000 income ceiling is reached.

The big thing for me is to throw out the U.S. tax code, abolish the IRS, and substantially simplify the tax code, especially to make it family and business friendly, as opposed to its present overall negative drag on savings, investment, and work, and its value to the political class as a primary mechanism of social engineering.

[_Drifting]

Hi Droopy, welcome back to the board.