Tax The Rich?

[jonah bear]

I have noticed that there is some discussion over the use of escalating tax brackets in the Canadian currency thread and I thought it would be interesting to discuss it.

I had previously had a BIG problem with escalating tax brackets because I felt it stifled productivity. Those who have the coin can roll it if you know what I mean.

However, in the context of the Canadian tax system, we must consider the most basic objective of an economy. Pass the buck around the circle as many times as possible. An economy thrives on rotation and savings slow down the rotation. Who has the savings? The rich, of course! So, in this sense it seems as if escalating tax rates on upper income brackets make sense.

What about the productivity problem I mentioned above? Well, in Canada (and, I imagine, the U.S.), anyone who gives a hoot about productivity is investing their $ in businesses which inevitably become corporations. This money is sheltered at a low private corporation rate to the extent that it is invested to produce 'active business income'. This is a nice offset to conquer the threat to productivity.

So, in the end, those who pay the higher taxes are those who are 'sitting' on their money. The only notable, and perhaps, unfair exception are rental properties. Rental income is considered 'passive' and is automatically taxed at the highest marginal rate (there are certain exemptions but they are tough to meet). I object to this on the grounds that providing rental services is anything but 'passive'. Most landlords I know are spending a lot of time running these businesses. A topic for another day, perhaps.

It is my humble opinion that the escalating tax % on upper tax brackets is conducive to productivity. If they are going to provide relief, provide it to the small and mid-size businesses who still fuel 85% of our economy (though you would never know it with the overshadowing attention given to TSX listed companies).

Does anyone have thoughts on this matter? Have I missed a major pitfall of high tax rates on high income?

[$cirisme]

What, you think that when people save their money, it goes into a literal bank vault and does nothing?

Your premise is extremely flawed.

[Crow]

Cir, everyone knows that the bank just prints some money when those small and medium business need to borrow capital in order to produce goods.

[$cirisme]

Cir, everyone knows that the bank just prints some money when those small and medium business need to borrow capital in order to produce goods.

This is why I ought to become a banker.

[Crow]

All you need is a scanner and a good inkjet printer.

[Jnthn]

As a matter of principle, I don't like the idea of higher tax brackets. I could be persuaded that there's a case for a discounted tax rate for those on low incomes, but I think that can be better dealt with by tax allowances.

My gut feel is that higher tax brackets only act as an incentive to move to tax avoidance and even tax evasion, something that is a realistic prospect to those with a higher income.

On a parallel note, when I've talked about the matter, some Christians conflate higher-rate tax paying with the onus placed on the rich. This is not the same thing. The State is a secondary conduit for the social responsibilities of the Church.

J

[$cirisme]

Besides, this is America. You think our problem is that we're saving too much and buying too little?

[jonah bear]

What, you think that when people save their money, it goes into a literal bank vault and does nothing?

Your premise is extremely flawed.

I don't think that it is a flawed premise.

As a person who is involved in the tax preparation business, I see the bulk of investment income flows to seniors who have done well for themselves over the years. What do seniors tend to invest in? T-bills, bonds, GIC's, and high interest bank accounts (i.e. the bank vault).

Also, you seem to have missed the part of my post where I mention those who wish to spend their vast disposable income can increase the productivity of their communities, states (or provinces), and nation by investing in businesses. In my region, we have a group based out of Halifax, Nova Scotia who are called the 'Angel Investors'. This is a group of retired entrepreneurs who have decided to take a portion of their vast savings and invest in 'high-rolling' industries who they feel have a good chance of providing a desired extension to the economy. Now this captures the spirit of economic sustainability and maintains the economy (remember, passing the buck is germane to the survival of the economy). This busts the bubble of savings.

Besides, this is America. You think our problem is that we're saving too much and buying too little?

Good point!

No, it is a matter of spending too much on non-productive assets. If those dollars that were being wasted were to recycle into productivity (i.e. business) thus creating sustainable jobs and a tangible return to the investor (in exchange for that 2-week 'high' that they would have otherwise gained from investing these same $ in a PS3).

Solution = recycle dollars more into business, get taxed less. Lower brackets get benefit by increased employment.

I think that the system, while flawed in many other areas, works in this regard.

[jonah bear]

As a matter of principle, I don't like the idea of higher tax brackets. I could be persuaded that there's a case for a discounted tax rate for those on low incomes, but I think that can be better dealt with by tax allowances.

My gut feel is that higher tax brackets only act as an incentive to move to tax avoidance and even tax evasion, something that is a realistic prospect to those with a higher income.

On a parallel note, when I've talked about the matter, some Christians conflate higher-rate tax paying with the onus placed on the rich. This is not the same thing. The State is a secondary conduit for the social responsibilities of the Church.

J

The big problems with tax evasion, IMO, come from the cash economy. This will exist irrespective of tax brackets. I'm sure that the powers are interested in removing cash from our lives because it is so easy to hide from the taxman.

I'm a big advocate for low-to-no tax on small to mid-size biz corporations. Higher tax on passive income (to encourage investment) and low-to-no tax for lower incomes. Your idea of tax credits are a good way to handle the plethora of unique circumstances in the financial lives of the low-to-middle income earners.

[Teallaura]

Um, don't investments in T-bills, bonds and bank accounts get used in the form of grants (in the case of T-bills) or loans? Why must an investment be high (or higher) risk in order to stimulate the economy?

[nomad]

yeah.

You seem to have a strange understanding of what things like T-bills, bonds, and even savings accounts are. The money doesn't just go into some vault, where money magically gets added to them. Where do you think the interest on that savings account comes from anyways?

Businesses (or municipalities) sell bonds in order to raise money, in order to do something with it. I.E. - they are going to spend it and invest in business. T-bills are the same thing (you know that massive trillion dollar debt the federal government has? well, a good portion of it is in t-bills), it ends up being money the government spends which goes back into the economy.

Even savings accounts don't get retained by the bank. You know all those credit cards and mortgages the banks issue? Well, they are (at least partially) funded by savings (i don't know the actual percentages, things like fannie mae have changed the source of capital some). The bank only has to keep some small percent of savings onhand to deal with day-to-day operations, it has been as low as 2% to my knowledge, the rest gets issued as mortgages, small business loans, etc.

This is why bank runs are such a big deal... if 10% of your depositors come on any given day looking for their money, the bank just doesn't have that kind of cash reserves, and can't call in its loans.

Most 'rich' people are not sitting around on a ton of cash anyways, it's usually invested in the stock and bond markets (how much of Bill Gates' billions is in microsoft stock? about 900 million shares, or over $30 billion dollars). You can't just pull it out and repurpose it, it doesn't work that way. You might be able to argue that money in the stock market isn't really 'doing anything', maybe, but I don't think you can say that for the bond markets.

[$cirisme]

I don't think that it is a flawed premise.

As a person who is involved in the tax preparation business, I see the bulk of investment income flows to seniors who have done well for themselves over the years. What do seniors tend to invest in? T-bills, bonds, GIC's, and high interest bank accounts (i.e. the bank vault).

No, if there's interest there is no way in hell they are just sitting in the bank vault collecting cobwebs.

Interest is your share of the profits when your investments/savings get used in other capital-producing ventures.

And, don't forget, that capital is an essential part of the economy. If nobody saved and invested, the government would not have money to flush down the toilet in Iraq and Afghanistan, companies could not build factories, etc.

Our entire economy would crumble without savings and investments.

The real "problem" (if you want to call it that) is that a huge part of our savings and investments do not come from Americans but foreigners. Which is why the dollar isn't doing so hot right now.

Also, you seem to have missed the part of my post where I mention those who wish to spend their vast disposable income can increase the productivity of their communities, states (or provinces), and nation by investing in businesses. In my region, we have a group based out of Halifax, Nova Scotia who are called the 'Angel Investors'. This is a group of retired entrepreneurs who have decided to take a portion of their vast savings and invest in 'high-rolling' industries who they feel have a good chance of providing a desired extension to the economy. Now this captures the spirit of economic sustainability and maintains the economy (remember, passing the buck is germane to the survival of the economy). This busts the bubble of savings.

Investing and savings is good for the economy was my entire point.

So you're just being self-contradictory then?

No, it is a matter of spending too much on non-productive assets. If those dollars that were being wasted were to recycle into productivity (i.e. business) thus creating sustainable jobs and a tangible return to the investor (in exchange for that 2-week 'high' that they would have otherwise gained from investing these same $ in a PS3).

Did you just say that money is being wasted by being saved and invested?

I know you just didn't say that it's being wasted by buying cheap crap because your theory of economic development absolutely depends on it.

[Paintbucket]

Sure tax the rich. Tax everyone 20% or so. That's fair.

[jonah bear]

Um, don't investments in T-bills, bonds and bank accounts get used in the form of grants (in the case of T-bills) or loans? Why must an investment be high (or higher) risk in order to stimulate the economy?

Investments in T-bills, bonds and bank accounts are investing money in....you guessed it, banks!

Granted banks do invest in mutual funds, so it could be argued that they are stimulating the economy but they are, most certainly, not investing in small business (just try to get a loan sometime if your a small business owner).

Putting our future growth into only a few pots (big corporations who are publically listed) don't generally bring about growth.

[jonah bear]

You seem to have a strange understanding of what things like T-bills, bonds, and even savings accounts are. The money doesn't just go into some vault, where money magically gets added to them. Where do you think the interest on that savings account comes from anyways?

It comes from the banks investment in public companies (through mutual funds or other investments). Tell me how much of this comes from small to mid-size businesses.

Businesses (or municipalities) sell bonds in order to raise money, in order to do something with it. I.E. - they are going to spend it and invest in business. T-bills are the same thing (you know that massive trillion dollar debt the federal government has? well, a good portion of it is in t-bills), it ends up being money the government spends which goes back into the economy.

I'm not seeing how incurring massive amounts of debt to be used for government spending helps the economy.

I would rather have a surplus with little to no debt. The gov't can't help the economy if it is defaulting on it's interest payments.

Even savings accounts don't get retained by the bank. You know all those credit cards and mortgages the banks issue? Well, they are (at least partially) funded by savings (i don't know the actual percentages, things like fannie mae have changed the source of capital some). The bank only has to keep some small percent of savings onhand to deal with day-to-day operations, it has been as low as 2% to my knowledge, the rest gets issued as mortgages, small business loans, etc.

I don't know how things work in the U.S. but the Canadian banks are not small business lendors. We have crown corporation banks that fill the gap when the entrepreneur needs working or long term capital.

The chartered banks invest their money into publically listed companies. A stifling effect on an economy that is 85% driven by small to mid-sized companies.

Most 'rich' people are not sitting around on a ton of cash anyways, it's usually invested in the stock and bond markets (how much of Bill Gates' billions is in microsoft stock? about 900 million shares, or over $30 billion dollars).

See, though, this is exactly the point. Bill Gates puts his $ into Microsoft, a huge public company. How much of an effect does that have on the overall economy? Well, it's arguable but we see what effect consolidation has on the businesses (lost jobs and 'economies of scale' where people pay the price for efficiencies). The huge corporations amass assets and, in the process, stop the dollars from trading hands.

You can't just pull it out and repurpose it, it doesn't work that way. You might be able to argue that money in the stock market isn't really 'doing anything', maybe, but I don't think you can say that for the bond markets.

Why not? I just argued for stock market stagnation problems.

The same definitely applies to the bond markets. It's basically like this, place monies with the few and the economy stagnates, spread monies to the many (i.e. small businesses) the economy thrives.