Andrew Mellon: Friend of Tax Fairness

In his 1924 classic Taxation: The People's Business, Treasury Secretary Andrew Mellon wrote:

“The history of taxation shows that taxes which are inherently excessive are not paid. The high rates inevitably put pressure upon the taxpayer to withdraw his capital from productive business."

Key words here: inherently excessive. That's obviously in the eye of the beholder.

But he also wrote:

“The fairness of taxing more lightly income from wages, salaries or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it; in the other, the source of income continues; the income may be disposed of during a man’s life and it descends to his heirs. Surely we can afford to make a distinction between the people whose only capital is their mettle and physical energy and the people whose income is derived from investments. Such a distinction would mean much to millions of American workers and would be an added inspiration to the man who must provide a competence during his few productive years to care for himself and his family when his earnings capacity is at an end.”

So explain to me and Andy again why we tax capital gains and "carried interest" at 15% while nurses and office managers are taxed at a marginal federal rate of 43% (28% + 15.3% FICA tax)?

Is it that now that we have Social Security for workers, we need to give owners a little Investor Security as well, or what?

More Gove County Photos

Entrance to Cemetery at Grainfield, Kansas
Originally uploaded by ckhartman

I have added a few photos to the Flickr photoset of Gove County, Kansas that I started last summer.

So What's the Deal With: TSA-Approved Luggage Locks

So what's the deal with these TSA-approved luggage locks that supposedly foil pilferers but which have a mechanism that allows TSA employees to open them with a special key so they can rifle through our luggage looking for contraband?

Some not-mutually-exclusive possibilities:

1. A practical compromise between the competing interests of airline security and privacy.

2. Why can't the airlines just do something about the pilferage?

3. Give me a break! Like those special TSA keys never find their way into the wrong hands.

4. Just another part of "security theater," the government-manufactured illusion that terrorist attacks can be reliably prevented.

5. A violation of the Fourth Amendment protection against unreasonable search and seizure.

6. Equivalent to walking ourselves into the gulag and handing the jailer the key.

I say, it's definitely Security Theater, probably not a violation of the Fourth Amendment, and not quite equivalent to self-gulagization, although it certainly feels like walking toward the gulag.

Also, no, the airlines can't do anything about the pilferage; yes, the TSA keys probably get left in restrooms or on break room tables from time to time; and nothing that is at root theatrical can ever be truly practical.

Business Advice Sought

Dear Ben Bernanke,

Like JPMorgan and Wells Fargo CEO John Stumpf, I am interested in buying an investment bank with the Fed's backing, but I'm not sure what to look for in an investment bank. What sorts of things are important? Also, I would like to minimize travel.

Keith's Word of Warning: Moths

Before bringing in a basket of laundry that has been hanging out on the line all morning, check for freakishly large, aggressive moths that may have attached themselves to a bedsheet or shirt.

Marginal Tax Rates

Following up on "Alex's" comment on the results of my cleaning study, let's turn now to the real Laffer Curve, which holds that there is a theoretical optimum marginal tax rate (if by optimum you mean revenue-maximizing). Too low, and you give up tax revenue that people would otherwise be willing (if not necessarily happy) to pay; too high, and people theoretically would slow down or stop working or investing, so there is less money made and taxed.

Certainly at 100% tax rate there would be no point in working, unless sustenance was provided by the state. For all but the most patriotic people, however, this amounts to slave labor, and such a regime would tend to be violently coercive.

Rather than get into trying to figure out what the optimum marginal tax rate is, I want to focus on an oft-repeated line from billionaire investor Warren Buffett. Here he is in a recent interview with Tom Brokaw:

Tom, I've been around rich people all my life. And I have seen capital gains taxes close to 40 percent. No one went home at 3 in the afternoon and said, "I've worked enough, and because tax rates are so high, I think I'll-- I'll go to the movies." ... I've been managing capital for 50 years for other people. No one left and said, you know, "This-- the taxation system's too tough. I-- I think I'll just stick it all under my mattress." They can't stick under their mattress. They're going to invest their money regardless.

This sounds good, but I wonder if it is really true. First, Buffett is conflating working and investment a little bit here. Certainly there are investments, especially hot-money financial investments (as opposed to cold-money capital investments like building a factory), that are especially sensitive to the tax rate. While Buffett is right that a financier won't stick her money in a mattress, a given tax rate might induce her to keep it in cash equivalents instead of taking a flyer on a new venture. None of this has anything to do with "working."

As for "working," I wonder: Has there really never been someone who took a look at the tax rate and decided it wasn't worth it to work an extra hour? Probably not, especially recently, with the top marginal tax rates at historically low levels, particularly on income from capital. But, it would only take one tax-deterred worker to falsify Buffett's claim, at least if we take the guy's word for it that he stopped working because of high taxes and for no other reason.

On the other hand, it would also be easy for someone to blame the tax system for making him stop working when he was actually just bored or lazy.

Keith's Word of Warning: Heat Transfer

When trying to keep coffee hot in a thermos, do not then absentmindedly place thermos in refrigerator.

Shopping List

The New York Times offers a list of the 11 best foods you aren't eating. Here's where I stand on these foodstuffs.

1. Beets. Convinced that I hate them, but willing to try again, especially raw and grated.

2. Cabbage. Check. Sauerkraut Liberty Cabbage on a grilled bratwurst anyone?

3. Swiss chard. Check. Sautéing seems to make any leaf palatable. I plan to try a sautéed hosta leaf someday.

4. Cinnamon. As in the toast.

5. Pomegranate juice. Am bigoted against it due to excessive trendiness; will try.

6. Dried plums (prunes). "Wrapped in prosciutto and baked" is mouth-watering.

7. Pumpkin seeds. Expensive sans pumpkin, but see #11...

8. Sardines. Small ick factor here. Someone I know is a fan; she likes them grilled, Portuguese style. Mashing them with dijon mustard and onions does sound very good. When in doubt regarding distasteful animal parts, mashing is always a good solution.

9. Turmeric. It makes things yellow. What's not to like?

10. Frozen blueberries. Smoothies.

11. Canned pumpkin. How about scraped out of an actual pumpkin, along with the seeds from #7?

Deep Cleaning

A recent study undertaken by me has found that the optimum interval for a really deep, thorough cleaning of the kitchen is eight years. (We're not talking wiping counters or sweeping floors here. This is every-nook-and-cranny empty-the-cupboards floor-so-clean-you-could-have-your-appendix-out-on-it type cleaning.)

The improvement brought on by the cleaning is so noticeable that it raises household morale and labor productivity for weeks afterwards, and possibly also makes food taste better.

More frequent deep cleaning is less efficient because the improvement effect is less pronounced per unit of effort. At the extreme, constant 24-7-365 cleaning would result in maximum cleanliness but no free time to enjoy it.

Deep cleaning that is less frequent than eight years would obviously require less lifetime effort but begins to tip the entire dwelling into a "the hell with it" spiral that ultimately settles at a bad equilibrium involving local health authorities.

Shooting the Breeze

George Soros, Martin Wolf and some other dudes get together to talk future prospects for the economy. [via]

The level of economic and financial experience I would need to confidently assess which of these experts is right about the future is so great that if I had it, I wouldn't need an expert. Who, exactly, are these symposia for? For the generalist reader, it's like a buffet of opinions...just take what you know you're probably going to like and forget the rest.

My take-away is to spend as little as possible, live as far as possible below one's means, keep short-term money in an HSBC or ING savings account and long-term money in a low-cost index fund. But that's the same thing I would do if the economy were booming and prospects looked bright. Again, if I was sophisticated enough to go beyond these basics in good times or bad, I probably wouldn't gain any insights by reading this symposium.

Therefore, I propose that all symposia, colloquia, roundtables, and panels be banned forthwith.