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How high can capital taxes go without killing your economy?

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Jaiddin
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Post: #1
How high can capital taxes go without killing your economy?

I'm working with a tickless state, USA template, and it's into a spiral downward.

Despite the reform that forces businesses to employ people (which kept unemployment extraordinarily low for quite a while after its introduction), I'm now in a cycle with investment drying up, rising unemployment, and dropping popularity. I can probably hang on for a while with secret files, but my nation's prosperity is probably over.

I also implemented (a low) BI recently through the task one gets after implementing NIT. I've done that before with no problems, though previously I'd had a surplus and in this case it turned a small deficit into a somewhat large one.

I really believe in high capital taxes. I hate the idea of taxing income from investments lower than that from work, and I know in real life that can work, as during the prosperous Clinton years in the USA, during most of his presidency there was no differential between capital gains taxes and taxes on income from work (and after Clinton did sign a differential it was a small differential).

GWB implemented a much larger differential without increasing growth, but even under him it was still 15% on investment income, much higher than default for the USA template.

I'm raising most of my tax revenue through excise taxes, to try to force the savings rate up. Then the high capital tax (by standards on this site) is meant to fight inequality.

Is there any way to tax capital income as high as income from work without torching your economy? Or is that a limitation of the site's model? And if not, how can one seek a low Gini coefficient successfully?

05.07.2014 14:55
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Helsworth
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Post: #2
RE: How high can capital taxes go without killing your economy?

High capital taxes isn't the problem, since your shadow economy isn't in the orange or red. I think your lack of popularity has more to do with task options rather than the actual budget itself. Anyway, if you want the savings ratio to go up - you need to increase the fiscal deficit. The capital tax rate itself has a different computation than that of the acquisition tax for instance. So a 4 to 6% capital tax in Ars Regendi cand be considered mild to high.
Furthermore, reduce the excise tax because, high as it is, only works to squeeze regressively income from people who pay their taxes...
You might want to consider lowering welfare, to bring it in sink with the living cost - currently welfare is above it.
If you add the basic income to that, no wonder your unemployment rate is high. Make sure pensions and welfare plus basic income don't become a better alternative to the average wage/income.
Lower the nominal interest rate by as much as you can in order to lower your interest payments (which go to fatten bankers anyway).

Btw, those "prosperous" Clinton years budget surpluses caused the recession! Budget surpluses erode previously accrued nongovernment sector financial savings.
Basic double-entry bookkeeping: (S-I)+(G-T)+(X-M)=0


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This post was last modified: 05.07.2014 15:23 by Helsworth.

05.07.2014 15:22
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Jaiddin
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Post: #3
RE: How high can capital taxes go without killing your economy?

Helsworth Wrote:
Btw, those "prosperous" Clinton years budget surpluses caused the recession! Budget surpluses erode previously accrued nongovernment sector financial savings.
Basic double-entry bookkeeping: (S-I)+(G-T)+(X-M)=0


As far as what to do within the game, I'm fully listening to what you said.

I do think the popularity plummet is more than the public's reaction to the task options, though they may have wrecked the economy.

Unemployment is in double digits as I write this, after years of being around 1% (because of the reform), so I don't blame the public for being pissed off. I understand why to cut welfare, though with my low popularity (thus lack of influence) right now it would end up being by only 4% a year; it'll be the max I can do.

But as to the surpluses run toward the end of the Clinton administration in real life, I know this isn't the forum for it, but I'm not on the same page with you at all (though my point actually were the high capital gains taxes compared to any in the game).

When the economy is healthy, you have to get rid of as much of the national debt as possible, so when the economy hits hard times (as in '07-'08 in the USA) you can deficit-spend to help get out of it. By GWB massively cutting taxes to turn the surplus into a deficit, he left himself and then Obama without wiggle room when the economy hit an iceberg. A much bigger stimulus package would have been possible if the budget had been in surplus and the debt reduced or eliminated when Obama took office.

05.07.2014 16:29
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Helsworth
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Post: #4
RE: How high can capital taxes go without killing your economy?

Jaiddin Wrote:
When the economy is healthy, you have to get rid of as much of the national debt as possible, so when the economy hits hard times (as in '07-'08 in the USA) you can deficit-spend to help get out of it. By GWB massively cutting taxes to turn the surplus into a deficit, he left himself and then Obama without wiggle room when the economy hit an iceberg. A much bigger stimulus package would have been possible if the budget had been in surplus and the debt reduced or eliminated when Obama took office.

We can talk about what we want.
See, this is why both deficit hawks and doves get it wrong. The doves think that the public debt needs to be lowered, that the fiscal deficit needs to be cut in the upward cycle. These things are precisely the things which MAKE the upward cycle drop into a recession.
Obama's fault was that he allowed the Bush tax cuts to expire - that brought the deficit even lower. Government fiscal surpluses ARE NOT national savings. Net fisca surpluses don't accrue anywhere; when the government takes in more money out of the private sector via taxation than it spends in, it makes the net financial savings within the private sector negative. All the money in the nongovernment sector used to pay taxes and buy government debt - it all comes (according not to ideology, but to double-entry bookkeeping) it all comes from government spending. Unemployment is always the result that fiscal deficits are too low in satisfying the private sector's desire to pay taxes and net save. Employment in capitalism is driven by sales. I can't produce and hire people if I can't sell. And I can't sell if you can't buy. So either the foreign sector leverages itself in order to buy my products (I'm relying on importing aggregate demand from abroad) or the government creates domestic aggregate demand by running fiscal deficits.

The public debt is, at operational level, the movement between 2 buffer stocks: the currency and reserve balances. To quote Abba Lerner, the purpose of the national debt is to let the public hold interest bearing bonds instead of letting the public hold reserves earning interest.
The US dollar is nothing more than a tax-credit; fiat money is tax-driven money. The public debt, tax-credits outstanding. The public debt serves several purposes - such as allowing the gov/CB to control short term interest rates in the market and provide a vehicle for institutional savings (pension funds for instance). But its purpose is NOT to "finance" public spending.
In a free-floating fiat regime, public spending finances government taxation not the other way around. As a point of logic, in order for the government to borrow its own money - it needs to have spent that money into existence in the nongovernment sector; before the gov takes it on as a loan and promises to pay interest on it.
To claim otherwise, that government taxation finances gov spending is not only illogical, it is an operational impossibility. When the government borrows its own currency, the central bank (who is the scorekeeper, keeps all the numbers in a massive spreadsheet) is simply shifting figures on the government's own books from one account to the other. When the government pays off the debt, it debits the checking/reserve accounts and it credits the securities account. Vice-versa when it contracts debt.

All transactions within the nongovernment sector net to 0. One man's spending is another's income. One man;s loan is another's surplus. Every country net exporter of goods and services is a net importer of aggregate demand. The only way the financial net in the nongovernment sector (the balance of nonresidents + the balane of domestic firms and households) can be positive or negative is via VERTICAL transactions. Positive, if the government is running a fiscal deficit, or negative if the government is running a fiscal surplus. Fiscal deficits create net financial assets within the nongovernment sector.

Government taxation creates unemployment of money paying jobs, and public spending employs the unemployed previously created by taxation. Thus, permanent and involuntary unemployment is a government policy choice. The neoliberal establishments call it "the unemployed buffer stock" or NAIRU; but the NARIU is predicated simply only on data fudge.
See here, Nairu is a myth: http://modernmoney.wordpress.com/2011/02...is-a-myth/
The purpose of taxation is to create unemployed people looking for paid work (paid in the government's own debt-tokens), its purpose is to create a permanent demand for the government debt-tokens or money - thus giving value to the currency. The purpose of public spending is to create aggregate demand in the economy; the purpose of taxation is to drain excess aggregate demand from the economy.

So long as you have unused resources and unemployment (people willing and able to work) - the government is either taxing too much, spending too little or both. The correct-sized fiscal deficit is that which achieves and maintains full employment and price stability. I suggest you drop the new-keynesian (orthodox) route, and look at MMT (modern monetary theory or chartalism) and the post-keynesian school. After all, Krugman got his ass handed it out to him by Steve Keen. ALL the neoliberal models, the reason why they fail, is because they DO NOT incorporate debt and money in their measurements.

If you want to learn about the operational realities of the modern monetary system, I recommend these great vids and these great heterodox economists: Warren Mosler, Randy Wray, Michael Hudson, Steve Keen, Stephanie Kelton, and Jamie Galbraith.

The historical evolution of debt and money


Governments are not households


Real vs Nominal economy


Fiscal policy vs Monetary policy


Warren Mosler on soft currency economics


Steve Keen showing the fallacies of both neoliberal and post-keynesian models. The latter can be redeemed, the former cannot.


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This post was last modified: 06.07.2014 11:19 by Helsworth.

06.07.2014 10:24
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Alexei B.Miller
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Vlaxia
Post: #5
RE: How high can capital taxes go without killing your economy?

All debt must be repaid....what happens when debt exceeds GDP several times over? How will the people ever repay the debt? After all the debtors do demand interest on the debt. Look at Argentina.....the government cannot just print a trillion pesos to pay off the debt because the cost of dollars in Argentina will rise with the inflation of pesos..Credit is not infinite. Helsworth your theories aren't for every nation. Maybe for some but not all, since many economies are different.


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06.07.2014 21:09
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Helsworth
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Post: #6
RE: How high can capital taxes go without killing your economy?

Alexei B.Miller Wrote:
All debt must be repaid....what happens when debt exceeds GDP several times over? How will the people ever repay the debt? After all the debtors do demand interest on the debt. Look at Argentina.....the government cannot just print a trillion pesos to pay off the debt because the cost of dollars in Argentina will rise with the inflation of pesos..Credit is not infinite. Helsworth your theories aren't for every nation. Maybe for some but not all, since many economies are different.

Argentina chose to default because that's what the politicians agreed upon. Argentina kept the peso at a fixed exchange rate with the US dollar - it wasn't free floating. If it was, then sovereign default would not have been an operational concern. Under the fixed exchange rate it was. Of course Argentina suffered a little bit of hyperinflation after the fixed exchange rate fell with the US dollar. It's a no-brainer.

Second, you do not understand the operational reality when a government issues debt in its own currency. As a simple point in logic, in order to borrow its own money, the government must first spend it into existence (and it spends it into existence in the nongovernment sector).
The fiscal deficit funds remain in the nongovernment sector as net financial savings - and then the government chooses to take on those particular funds as debt on which the gov promises to pay interest. At an operational level, the public debt is nothing more than the movement of 2 buffer stocks: the currency and reserves. To quote Abba Lerner, the choice of issuing gov debt is a preferene of the government that the public (bankers) should own interest bearing bonds, rather than IOR on reserves.
When the government issues sovereign debt, it simply debits the treasury account and credits the reserve account. When the government pays off its debt, it simply debits the reserve account and credits the treasury account.
That's all the CB registers on its spreedsheat - the government simply changing numbers on its own books from one account to the other.

The size of the public debt needs to be what it is, depending on the government's goals and the private sector's goals. Public debt itself is an intrinsic part of monetary policy, NOT fiscal policy. So it has to do with controlling the overnight interest rate and providing a vehicle for institutional savings - such as for pension funds for instance. The size of the public debt DOES NOT impact future generations with higher taxes or what not - simply because taxes don't finance government spending.
Japan's debt to GDP ratio is around 220%. Is there inflation in Japan because of this reason alone? No. Other countries have super low levels of debt and they still have rampant inflation. So the size of the public debt is NO measurement of inflation. Is there a risk of bankruptcy for the Japanese government? No.

Not all economies are the some. Correct. Credit is not infinite. Incorrect. Money is NOT a constraint - physical resources and free labor are - and those physical things are the true yardstick. That's why MMT uses the byword: full-employment and price stability. And not anything beyond that. At operational level, it doesn't matter whether we're talking about Sweden, Turkey, Nigeria or Honduras.
If you get the institutional framework enforced according to the right rules, society can achieve its aims by applying Chartalist principles.


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This post was last modified: 06.07.2014 21:49 by Helsworth.

06.07.2014 21:44
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Alexei B.Miller
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Vlaxia
Post: #7
RE: How high can capital taxes go without killing your economy?

Governments are borrowing from themselves AND other entities as well.


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06.07.2014 23:51
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chad7405
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Post: #8
RE: How high can capital taxes go without killing your economy?

Alexei B.Miller Wrote:
Governments are borrowing from themselves AND other entities as well.

Helsworth is right though; In a nutshell, paper money is a physical representation of a country's debt. So to pay for something, America will give them a dollar which stands for a tax credit/IOU for later. Money is just a medium of exchange, and all debt must be repaid within the private sector eventually but not in the government. The purpose of public debt is to increase private credit.

07.07.2014 00:02
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Alexei B.Miller
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Vlaxia
Post: #9
RE: How high can capital taxes go without killing your economy?

We shall see what happens when the U.S. debt skyrockets..you pro-debt bunch are really something else!


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07.07.2014 05:13
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Helsworth
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Post: #10
RE: How high can capital taxes go without killing your economy?

Alexei B.Miller Wrote:
you pro-debt bunch are really something else!

Thanks Daumenhoch


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07.07.2014 18:06
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