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The Puzzling Return of Glass-Steagall

The Puzzling Return of Glass-Steagall →

Alex Tabarrok, on Senator Warren's proposal to resurrect the Depression-era Glass Steagall legislation.

Separate commercial and investment banking? Please. The problem was that investment banking, in the form of shadow banking, become so separated from commercial banking that the Fed no longer had any idea where a majority of credit was being generated. Credit creation separated from banking as understood by the Fed, and moved into the shadows, hence, the term shadow banking.


Glass-Steagall would merely shuffle around organizational boxes in the less important regulated banking sector. Indeed, why would anyone think that 1930s policy is the solution to a 21st century problem?

Indeed. Senator Warren strikes me as the worst kind of Senator: interested in sound bites that play well on TV and in blogs but have little relevance to actual problems and solutions.

Sorry, Folks: One Way or the Other, You'll Never Be Able to Completely Count on Retirement

Sorry, Folks: One Way or the Other, You'll Never Be Able to Completely Count on Retirement →

From Megan McArdle, at the Daily Beast:

But in the end, they're the same package.  There's no way to take the risk out of betting on the future; by the time you can predict the future accurately, it's already the past.  

We're just picking how we want to take our risk, not whether we want to take it.  And if there's one thing we should have learned form the financial crisis, it's this: the minute we decide that we don't have to make that choice--that we have figured out some way to get rid of the risk altogether--is generally the moment that the universe decides to give it to us, good and hard.

It doesn't matter whether you choose a defined benefit plan (pension), a defined contribution plan (IRA or 401(k)), Social Security, or something else. There is no guarantee that you'll have the retirement of your dreams.

Mitt Romney's effective tax rate is very low: Most economists think it should be.

Mitt Romney's effective tax rate is very low: Most economists think it should be. →

Matt Yglesias, not known as a Republican booster, defends Mitt Romney's tax rate.

The main reason Romney's effective rate is so low is that the American tax code contains a lot of preferences for investment income over labor income. That's something that strikes many people as unfair on its face, and particularly unfair since it often means very low rates for extremely rich people like Romney. And Romney himself as a rich guy who's also a member of the political party seen as favoring the rich, and who's been recorded as whining that the working poor are undertaxed is perhaps not an ideal messenger for a defense of this policy.

But this is definitely an issue where the conservative position is in line with what most experts think is the right course, and Democrats are outside the mainstream.

The Buffett Rule is Unfair (and I Oppose It)

President Obama is proposing a new principle: the “Buffett rule”

President Obama on Monday will call for a new minimum tax rate for individuals making more than $1 million a year to ensure that they pay at least the same percentage of their earnings as middle-income taxpayers, according to administration officials.

Mr. Obama, in a bit of political salesmanship, will call his proposal the “Buffett Rule,” in a reference to Warren E. Buffett, the billionaire investor who has complained repeatedly that the richest Americans generally pay a smaller share of their income in federal taxes than do middle-income workers, because investment gains are taxed at a lower rate than wages.

This argument, however, ignores the entire concept of double taxation. I oppose the Buffett rule because investment income is already taxed twice: once as corporate income and once as investment income. This means that investors are actually paying higher taxes than everyone else.

I’ll illustrate this by walking through a simplified example. I’m aware that this is a very, very, very simplified example. (For instance, it ignores corporate tax deductions and other “tax breaks”. It also ignores whatever “loopholes” Mr. Buffett is currently using to reduce his own personal tax liability.) I think the general idea is correct, however.

Let’s say Berkshire Hathaway earns a profit of $18,000,000 and wants to distribute the entire amount as dividends to its shareholders. And, for the purposes of extreme simplification, let’s say that Mr. Buffett is the sole shareholder.

First, Berkshire Hathaway must pay U.S. corporate income tax on the profits. Corporate income of $18,000,000 would be taxed at a rate of 35%. The remaining balance would be distributed as investment income, to Mr. Buffet. Mr Buffet will then pay a capital gains tax of 15% on that money. Here’s how that breaks down.

Type Amount
Corporate Income $18,000,000.00
Corporate Tax (35%) $6,300,000.00
Income to Distribute $11,700,000.00
Capital Gains Tax (15%) $1,755,000.00
Personal Income $9,945,000.00
Total Tax Paid $8,055,000.00
Total Tax Rate 44.75%

Now, let’s imagine that we implement the “Buffett Rule” and we require Mr. Buffett to pay a 35% tax rate on his investment income. Here’s how that breaks down.

Type Amount
Corporate Income $18,000,000.00
Corporate Tax (35%) $6,300,000.00
Income to Distribute $11,700,000.00
Income Tax (35%) $4,095,000.00
Personal Income $7,605,000.00
Total Tax Paid $10,395,000.00
Total Tax Rate 57.75%

This rule definitely forces Mr. Buffett’s taxes up, but he’s hardly paying the same rate as the rest of us. He’s now paying a total tax rate of 58% on his income—far more than the 35% rate that “we” pay.

If we wanted to aim for equal taxation (the supposed aim of the Buffett Rule), we need to aim at more fundamental reforms. For instance, how about eliminating the corporate tax rate and then taxing investment income at the same rate as personal income? That would eliminate all of the hanky panky that goes on with the corporate tax code and would, in one fell swoop, eliminate all of its deductions and loopholes. It would simultaneously increase the taxes directly paid by Mr. Buffett. Here’s how that breaks down.

Type Amount
Corporate Income $18,000,000.00
Corporate Tax $0,000.00
Income to Distribute $18,000,000.00
Income Tax (35%) $6,300,000.00
Personal Income $11,700,000.00
Total Tax Paid $6,300,000.00
Total Tax Rate 35.00%

Mr. Buffett is now paying the same rate as “we” do. That’s fair, isn’t it?

Your dividend taxes are going up

The Dividend Tax Bill Arrives - WSJ.com

As the big tax increase day of January 1, 2011 approaches, the Democrats running Congress are beginning to lay out their priorities. Get ready for bigger rate increases than previously advertised.

Last week the Senate Budget Committee passed a fiscal 2011 budget resolution that includes an increase in the top tax rate on dividends to 39.6% from the current 15%—a 164% increase. This blows past the 20% rate that President Obama proposed in his 2011 budget and which his economic advisers promised on these pages in 2008.

(See "The Obama Tax Plan," August 14, 2008, by Jason Furman and Austan Goolsbee: "The tax rate on dividends would also be 20% for families making more than $250,000, rather than returning to the ordinary income rate.")

And that's only for starters. The recent health-care bill includes a 3.8% surcharge on all investment income, including dividends, beginning in 2013. This would nearly triple the top dividend rate to 43.4% in Mr. Obama's four years as President.

Do you think this will

a) encourage me to put more money into the stock market
b) encourage me to put my money somewhere else
c) encourage companies to pay out more money as dividends to stockholders
d) encourage companies to put their money somewhere else
e) both "b" and "d"

If you said "e", you're right. And, when the economy keeps failing to recover from the recession, you may try asking Nancy Pelois, Harry Reid, and President Obama if they have any idea what could have caused people to just sit on their money for a while. If you have a 401(k) account, you might also try asking them why they're trying to torch your retirement savings.

Finally, if you live in Wisconsin, you may want to give Senator Russ Feingold a call. He's up for re-election this year and he sits on the Senate Budget Committee. You might want to put those questions to him too. You can reach his local, Madison, office at (608) 828-1200. If you'd prefer email, his address is russell_feingold@feingold.senate.gov. If you'd prefer snail mail, you can send it to:

1600 Aspen Commons
Middleton, WI 53562-4716