Couple tax questions

[KrazyHorse]

Why would high sales tax lead them to invest outside their country?

[KrazyHorse]

And why would high rates of return on investment in their country cause them to invest outside their country?

[Kuciwalker]

Even worse, that tax is on interest on income which has already been taxed.

There is absolutely no reason to disincentivize savers in that manner.

It's not obvious to me why interest should be treated differently from other income, unless you want to incentivize saving in those kinds of accounts over investing or spending.

edit: ah, I see, because you want it to act as a counter to inflation

[KrazyHorse]

Please read the ensuing example.

The after-tax present value of earned income should be the same whether you choose to spend it now or later.

[KrazyHorse]

For somebody sitting in the 25% marginal tax bracket the after-tax present value of a marginal dollar is 75 cents if spent immediately. If it's saved at 6% interest (annual compounding) over 30 years then it's only 49 cents.

[KrazyHorse]

edit: ah, I see, because you want it to act as a counter to inflation

No. Though this is one factor (the tax is charged on nominal, not real accrual)

[Kuciwalker]

I'm not in favor of progressive taxes as a redistributive mechanism. I'm in favor of flat taxes coupled with a per-capita lump distribution.

Just curious if by this you actually mean an EITC-style thing.

[Kuciwalker]

Please read the ensuing example.

The after-tax present value of earned income should be the same whether you choose to spend it now or later.

But the only reason they wouldn't be (under a tax) is that $1500 now is worth $2000 later. Isn't that basically the definition of inflation?

[KrazyHorse]

I like the fact that its a distribution in cash rather than in kind.

I like the fact that for a certain part of the income distribution it reduces the marginal tax rate

I do not like the fact that for a certain part of the income distribution is increases the marginal tax rate

[KrazyHorse]

But the only reason they wouldn't be (under a tax) is that $1500 now is worth $2000 later. Isn't that basically the definition of inflation?

No, it's the definition of interest

"present value" is the future value discounted by the risk free rate

[Kuciwalker]

If all interest is taxed then why shouldn't the tax rate be part of the 'future value' equation?

[KrazyHorse]

If all interest is taxed then why shouldn't the tax rate be part of the 'future value' equation?

Kuci, what happens when you introduce any tax wedge?

It increases the rate that people who need money today have to pay, decreases the rate that people who are willing to wait are given (after tax), and reduces the amount of money loaned out.

The "true" present value should be discounted by what the risk free rate would be in a world without taxes. Which in the example I gave would be somewhere between 4.5% and 6% (this is a dynamic calculation and requires some knowledge of elasticities). Either way, the value is > 4.5%. The amount it's above 4.5% is the amount paid by lenders. The amount it's below 6% is the amount paid by borrowers. Again, note that this tax on lenders is OVER AND ABOVE the tax already paid by lenders in earning the money they lend out. The marginal tax on their earnings is HIGHER than is the marginal tax on somebody who chooses to spend his money today.

[Kuciwalker]

The "true" present value should be discounted by what the risk free rate would be in a world without taxes.

This is the part that I don't see a compelling justification for.

[KrazyHorse]

Dude, read the "TV" example. Replace the 2000$ with whatever number between 1500*(1.045^5) and 1500*(1.06^5) you think it should be.

Total marginal tax rate on labor is the difference between what you can buy in a counterfactual world without tax and what you can buy in the real world.

People work so that they can buy things. Money is an INTERMEDIATE GOOD. The total tax rate between my production (labour) and my consumption (spending) is what matters.

[Zkribbler]

edit: ah, I see, because you want it to act as a counter to inflation

Inflation?? We ain't got no inflation. In fact, the fear is now of deflation.

You shouldn't design tax policy to counter problems that don't exist.