When you study economics you find out that lots of things average people believe just aren’t so. You learn that inflation is caused by monetary stimulus, not an overheating economy or monopolistic pricing. You learn that imports from China (or automation or immigration) don’t cause our unemployment rate to rise. You learn that an economy can’t run both a current account deficit and a capital account deficit. I e. it can’t import lots more goods than it exports, and simultaneously outsource lots of jobs with overseas investments exceeding foreign investments flowing in. You learn that legal mandates banning service fees on X, or requiring employee benefit Y, or rent controls, generally hurt the people they are designed to help.
You learn that the fiscal multiplier is roughly zero . . . oops, that’s still a few years away.
And you learn that a wage tax is identical to a consumption tax. I’ve given up trying to explain why, hopefully someone in the comment section will fill in for me. In any case, we now have Mark Zuckerberg paying over a billion dollars in consumption tax for 2012:
Facebook’s (FB) stock market debut left founder and CEO Mark Zuckerberg with a paper fortune currently valued at $13 billion — and a 2012 tax bill of around $1.1 billion.
Zuckerberg’s whopping tax hit stems from his move last May to increase his stake in Facebook. On the day of Facebook’s initial public offering, Zuckerberg exercised a stock option and purchased 60 million Facebook shares at a “strike price” of 6 cents each.
Even if those shares are never sold, the IRS treats them as ordinary income at the time the options are exercised. The rationale is that such options are a form of compensation, just like regular wages.
A few observations. Commenters sometimes tell me that a wage tax won’t work, because all the rich guys will disguise wage income as capital income. Actually, it’s really easy to tax wage income if the government is determined to do so. Simply put the burden of proof on the income earner to show that the “capital income” is not disguised wage income. The IRS could greatly simply the lives of 98% of us by making the assumption that capital income earned from sources where the individual is not employed are actually capital income.
If there are currently loopholes in areas such as hedge funds, it’s because Congress wants there to be loopholes in areas such as hedge funds. The only thing standing between us as a radically simplified, radically more efficient, progressive consumption tax is a corrupt and/or ignorant Congress.
Both parties should declare a ceasefire in 2013, and replace both the personal and corporate incomes taxes with an equally large and equally progressive payroll tax (which taxes both wages and benefits.) Then in 2014 they can return to battling over how big and how progressive that payroll tax should be.