It’s All Very Taxing 82811d01

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    It’s  All  Very  Taxing     Today’s Outside the Box is something a little different for me. Howard Marks of Oaktree Capital Management has produced a most excellent summary of the problems inherent in “all things taxing” in the US. He delves into not only the specifics but also some of the philosophy of taxation. This is a balanced piece in which he tries to present all sides and arguments, giving us a very real picture of the dilemma we face, and leaving us to draw our own conc
    It’sAllVeryTaxing  Today’s Outside the Box is something a little different for me. Howard Marks of OaktreeCapital Management has produced a most excellent summary of the problems inherent in “allthings taxing” in the US. He delves into not only the specifics but also some of the philosophy of taxation. This is a balanced piece in which he tries to present all sides and arguments, giving us avery real picture of the dilemma we face, and leaving us to draw our own conclusions. Whatever we do going forward, including nothing, the outcome with regard to taxes is going to be difficult if not painful for most of us. We talk about everyone paying their fair share, but what does that mean?The answer is that it means very different things to different people.This goes hand in hand with my contention that we face very difficult choices, and none of them are pain-free. I have my preferred methods and choices, and you have yours, and your neighbors have yet more divergent views. But we must make the tough decisions, or the market isgoing to treat us as roughly as it is Italian debt. If we let it get to that point, the choices will be evenmore limited and painful.This is a longer than usual OTB but it is very good, and I suggest you send it on to others,as it provides a framework for discussion and understanding the positions that others in our societymight take – people of good will but with different understandings of how the world works andwhat is “fair.” Often, their views will not be based on the same rationale as yours or mine, and thusthey will come to different conclusions. But soon we will all make some very important decisions(at the polls) about who will make those decisions for us. Let’s choose wisely.Right now, I am going to choose to hit the send button and go along with my daughter Tiffani to dinner with Art Cashin, Rich Yamarone, and Barry Ritholtz, and see what wisdom theymay impart. With Art, you can always count on learning something, and on hearing somewonderful stories. I am sure we will also debate the end of the euro, among other pleasant dinner topics. I live for such moments. I will report back.Your enjoying a beautiful day in New York City analyst,John Mauldin, Editor Outside the Box    It’sAllVeryTaxing  ByHowardMarks  November16,2011    The issue is simple: the U.S. government generally spends more than it brings in . . . andrecently, a lot more. For years Congress was willing to serially raise the federal debtceiling and monetize the deficit. But this past summer, some legislators balked. Whenthe early August deadline for an increase in the ceiling arrived, our elected officialskicked the can down the road, but less far than usual. They created a Congressionalsupercommittee with unprecedented power to propose solutions, and they designedautomatic spending cuts in case no proposal won approval.  With the committee working under a November 23 deadline to find ways to reduce thefederal deficit by $1 trillion-plus over the next decade, and with a presidential electionless than a year away, the subject of taxes is all over the headlines and likely to remainthere. Thus I’ve decided to provide a background piece on the issues.  What form will the deficit-cutting action take? In fact, the possibilities fall into only four categories:  ã   cut discretionary spending, ã   reduce expenditures on entitlements,  ã   cut waste and fraud, or   ã   increase tax revenues.   Given the magnitude of the problem, the limited number of potential solutions, and thedifferences between the parties on the subject, there’s already debate regarding the fourthof those listed above. Democrats generally feel tax increases should be part of anysolution, and Republicans often insist that while they’re open to overhauling the tax code,total taxes must not rise.  What’s Fair is Fair    This memo got its start as an excuse for me to write about one of my greatest pet peeves:the so-called “fair share.”  Ask your typical Democrat or liberal about the idea of increasing taxes on upper-bracketearners, and what will they say? In my experience, the answer’s always the same:“ We’re not out to soak the rich. We just want them to pay their fair share. ” We’veseen it over and over for years. For example:    Were [the politicians levying taxes on Americans] seeking to redistributewealth, to recast society along more egalitarian lines? Or were they simplytrying to ensure that rich people paid their “fair share ”? The answer, predictably, is both. . . .  If poor and middle class Americans were going to be asked [by PresidentRoosevelt], of necessity, to shoulder much of the fiscal burden, then theyneeded assurance the rich were paying their share . . . .   No one made the case more succinctly than Rep. Cordell Hull, legislativefather of the 1913 income tax. “I have no disposition to tax wealthunnecessarily or unjustly,” he explained in his memoirs. “But I do believethat the wealth of the country should bear  its just share of the burden of taxation and that it should not be permitted to shirk that duty.”  (“Soaking the Wealthy: An American Tradition” The Wall Street Journal  ,January 29-30, 2011)  The rhetoric remained unchanged in the late twentieth century:  “We will lower the tax burden on middle class Americans,” [Bill Clinton] pledged in 1992, “by asking the very wealthy to pay their fair share .”(“The Middle-Class Tax Trap” The New York Times , April 17, 2011)  More recently, President Obama carried on the tradition.  I will veto any bill that changes benefits for those who rely on Medicare but does not raise serious revenues by asking the wealthiest Americans or  biggest corporations to pay their fair share . ( The New York Times ,September 20, 2011)  And here’s another reference from just a month ago:  In proposing a 5 percent surtax on incomes of more than $1 million a year to pay for job-creation measures sought by President Obama, SenateDemocratic leaders on Wednesday escalated efforts to strike a more populist tone and to draw Republicans into a confrontation over how muchaffluent Americans should pay to help others cope with a strugglingeconomy. . . .  “It’s interesting to note that independents, Democrats and Republicans andeven the Tea Party agree it’s time for millionaires and billionaires to pay their fair share of taxes,” [Senate Majority Leader] Reid said Wednesday.  ( The New York Times , October 6, 2011)    But what is the fair share? How is it to be determined, and by whom? WhenSenator Reid says, “it’s time for millionaires and billionaires to pay their fairshare,” he implies they haven’t been doing so thus far. How does he know? What’sthe standard? If there’s an objective standard for one’s fair share, why does it onlyseem to be those from the left side of the political spectrum who say it’s not being paid?And if there isn’t an objective standard, how can the fair share be determined? Thetruth is, fairness is almost entirely in the eye of the beholder, and “get them to paytheir fair share” seems like just another way to say “raise their taxes.”    There’s probably only one element of fairness that’s beyond discussion: those withhigher incomes should pay more in taxes. After that, everything is up for grabs.  ã   For example, we have a progressive system of taxation, meaning that higher earners don’t merely pay more in terms of dollars; they generally pay a higher  percentage of their incomes in taxes. Most people agree that this is fair. But is it?Why should success be penalized through greater taxation? And if the tax rate for those who earn more should be higher, how much higher? Should the topmarginal tax rate be double that applicable to lower-income taxpayers? Triple?What’s fair?  ã   Are some forms of income more desirable to society and thus deserving of taxation at lower rates?  ã   And should we encourage certain expenditures by making them deductible fromtaxable income?  The fairness of all of these things is subject to discussion and disagreement. They comeunder the heading of tax policy.  Is Taxation Progressive? Progressive Enough?  Under the U.S. system, people in higher income brackets pay tax at higher rates. (However, Mark Twain said, “All generalizations, including this one, are false.” For anexception to the generalization above, see the discussion of the “Buffett Rule” on page 5.) In large part, the question of fairness primarily surrounds whether the higher ratesare high enough.    Talk about “the eye of the beholder.” There’s evidence on both sides of this debate:  ã   The top 1% of U.S. taxpayers pay 38% of all individual federal taxes. The top10% pay 70% of all taxes, the top 25% pay 86%, and the top 50% pay 97%.  ã   That leaves the bottom 50% of all taxpayers paying only 3% of the total.
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