How will Americans escape the coming 70-80 percent income tax rates?

“The Economics of Soaking the Rich: What does Alexandria Ocasio-Cortez know about tax policy? A lot.” (Paul Krugman, NYT):

The controversy of the moment involves AOC’s advocacy of a tax rate of 70-80 percent on very high incomes, which is obviously crazy, right? I mean, who thinks that makes sense? Only ignorant people like … um, Peter Diamond, Nobel laureate in economics and arguably the world’s leading expert on public finance. … And it’s a policy nobody has ever implemented, aside from … the United States, for 35 years after World War II — including the most successful period of economic growth in our history.

As I said, Diamond and Saez put the optimal rate at 73 percent, Romer at over 80 percent — which is consistent with what AOC said.

What we see [from a displayed chart] is that America used to have very high tax rates on the rich — higher even than those AOC is proposing — and did just fine. Since then tax rates have come way down, and if anything the economy has done less well.

Which brings me back to AOC, and the constant effort to portray her as flaky and ignorant. Well, on the tax issue she’s just saying what good economists say

Back in the glory days to which Krugman refers, Americans escaped the high ordinary income tax rates by converting what looked like ordinary income into capital gains, taxed at roughly the same rate then as now. See https://philip.greenspun.com/blog/2016/05/06/eisenhower-era-tax-avoidance-strategies-from-eisenhower/

Let’s assume that the Democrats will regain control over the U.S. at some point and that there is a good chance that the young and charismatic folks such as AOC will be the leaders. We will then have the tax rates that they’re currently proposing.

What would be the impact on a successful Californian, for example? The current tax rate is 39.6 percent federal plus 13.3 percent state. So the earner can spend 47 cents of each gross dollar. With an 80 percent federal rate, the after-tax benefit of earning one extra dollar would be 7 cents. This is an 85-percent pay cut for the rich Californian, which should provide some motivation to act.

Question for today: How will Americans adapt?

The world is very different from what it was in the high-tax heyday. The economy is a lot more global. It is possible to pay 10 percent on income in the UK (see https://philip.greenspun.com/blog/2019/01/02/move-to-the-uk-if-youre-an-entrepreneur-10-percent-capital-gains-tax/ ) or 20ish percent in Estonia or Singapore. Americans can take advantage of foreign corporate tax rates by starting enterprises overseas, but individual income tax rates are available, however, only to those who renounce U.S. citizenship, which can be expensive and challenging. (Also, for anyone living in the UK, it is quite easy for a family court plaintiff to impose a 50 percent tax on assets after a two-year marriage! See Real World Divorce.)

We have corporate tax rates of about 26 percent now (Tax Foundation). Could it be that our most productive citizens will simply start corporations and accumulate profits inside the corporate shell indefinitely, Warren Buffett style, thus deferring taxes for decades?

Will our most productive citizens move to Puerto Rico for 183 days per year? (see Forbes for how Americans can become mostly tax-exempt and GQ for the lifestyle report)

Will every rich family set up non-profit orgs like the Clinton Foundation and run all of their Gulfstream charter and parties in Switzerland and Australia through the foundation?

Given our spectacular debt-to-GDP ratio, the fondness of the American voter for a command-and-control centrally planned economy, and the growing number of voters who aren’t subject to income tax (since they are on welfare or otherwise have low income), high future individual tax rates do seem plausible.

Or will productive Americans just decide to pay the exit tax and renounce their citizenship, following Eduardo Saverin‘s example?

Related:

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Meet in San Francisco next week?

Folks: I’ll be working in San Francisco Monday and Tuesday of next week (Jan 14 and 15). Please email me, philg@mit.edu, if you’re interested in getting together. One possibility is downtown coffee on the morning of January 16. I might be able to make it down to Silicon Valley on the 16th if I can finish work early.

Decided: Coffee at the Fairmont (Nob Hill) at 8:00 am. The lobby should be an awesome place for conversation! (unfortunately I don’t think that I can make it down to Silicon Valley)

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“A Wall is an Immorality” (but a “barrier” is okay?)

About 35 seconds into this video (Guardian), Nancy Pelosi says that “a wall is an immorality,” presumably explaining why she and other Democrats won’t vote to fund the “wall” requested by the Trumpenfuhrer.

On the other hand, we already have 580 miles of “barrier” (Wikipedia), which includes parts that look like walls and parts that look like fences.

Could the solution to our current political impasse be for Democrats to vote to fund an extension of the current “barrier”? (Or, if they truly do think that any kind of barrier is immoral, will they vote to tear down the existing 580 miles? If something is “immoral” then surely we don’t want to keep doing it.)

Related:

“I met Sonny for the first time in 1992 when we both were candidates for the Republican Senate nomination in California. I shook hands with him, as we prepared for a debate, and I immediately liked him. The first question in the debate was about illegal immigration. I gave a prepared three-minute answer. Sonny simply said, ‘It’s illegal immigration. It’s illegal. Enforce the law.'” (regarding Sonny Bono)

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Cuba: what happens to infrastructure when per-capita maintenance costs exceed per-capita income

Cuba was richer, per capita, than Singapore in 1959 (Forbes) and Havana was the richest part of Cuba. As such, the city enjoyed world class physical infrastructure circa 1959: roads, sidewalks, beautiful houses and colonial buildings, etc.

Except for some central business district areas and parts of the city that have been restored for tourist, Havana today is essentially in ruins. It is a good thing that not everyone has a smartphone because walking and trying to use a phone would likely result in falling into a pit (not marked off with cones) or stumbling over broken pavement. One guide said that approximately 33 buildings collapse monthly in Havana and 600 people are injured from collapsing ceilings, etc. (see also USA Today)

The GDP per capita today is about the same as it was in 1959 while the cost of materials and construction and construction have skyrocketed. There is no way that current Cubans could reproduce the infrastructure that their grandparents and great-grandparents bequeathed to them. Even if they never spent a dime on building anything new, I don’t think that 100 percent of their income would suffice to maintain the roads and buildings that they had in 1959 (concrete deteriorates rapidly in a hot humid salty environment).

Cuba should be a cautionary tale for any nation that isn’t experiencing substantial per capita GDP growth. Even if a country maintains a steady population and income per capita, the rise in the cost of repairing and rebuilding infrastructure means that quality and quantity will decline.

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Apple stopped innovating with iPhone 5S?

Apple is in the news for disappointing earnings growth. I wonder if this is due to lack of innovation. I’ve met a lot of folks who are still using their iPhone 5S and aren’t interested in upgrading unless motivated by a device failure. Thus, at least from the point of view of the average user, the company stopped innovating after the 5S was delivered.

I’m reasonably happy with the iPhone X, but am not excited about the XS or whatever Apple calls its latest and greatest. I would switch to Android if any vendor made a superior camera (in practice) to Apple’s. Now that I’ve stopped using ForeFlight, I have no allegiance to iOS (which maybe limits how much profit Apple can extract from people like me?).

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If Elizabeth Warren doesn’t become president…

… will the New York Times blame voters’ prejudice against women or voters’ prejudice against Native Americans?

Readers: How do you think our Massachusetts Senator will do?

Related:

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Cuba tourism: cruise ship versus hotels

Hurricane season is over so perhaps it is time to plan that Caribbean vacation. If you’re curious to visit Cuba as a U.S. citizen, you can choose between going native (hotels) and just touching briefly at the edges via a cruise.

Based on my December cruise with Royal Caribbean on Empress of the Seas, here are some thoughts…

The cruise is way cheaper than any of the land-based options that I saw. The basic rooms with window were being marketed at $100/night per person, including food and entertainment. If you need to be connected, Internet is roughly $40 per room additional per night (two people, one phone and one laptop each; unfortunately it was not working consistently on our ship and in our room).

A lot of the fun of Cuba seems to happen after 9 or 10 pm. Some cruises will dock overnight in Havana or stay late (we departed at 1 am so that people could come back from scheduled shows), but if you’re passionate about Cuban music the hotel option is probably best.

(Note that the cruise ship essentially becomes a temporary downtown hotel. The dock is smack up against the old city and a 5-minute walk from many of the liveliest tourist sections of town. See picture below.)

Cuban official salaries are low by US/EU/China standards, e.g., $60/month for a doctor or $20/month for a government job that requires a college degree (though keep in mind that they don’t have to pay taxes or rent). A pedi-cab driver can charge $5 or $10 for a ride if a tourist isn’t passionate about negotiation. A schoolteacher can substantially supplement her income with one night of, well, “work” with a tourist. Thus there is an entire industry of hustlers trying to persuade tourists to buy various things. Walking around Havana unescorted, a pair of male tourists will be saying “no, gracias” to offers of taxis, women, restaurant meals, and bars/shows every 30 seconds. A tour group out of a cruise ship, on the other hand, glides through this semi-official economy mostly unnoticed. Near the paddle-equipped guide and sporting a matching tour number sticker, the same two guys will be presented with an offer once every 10 minutes.

If you want to expend minimal dollars and zero effort to satisfy your curiosity regarding what life is like in Cuba and how socialism has worked out (recognizing that it hasn’t truly been given a fair chance!), the good news is that a couple of all-day guided tours off a ship will suffice. Perhaps it is the demographic, but we didn’t hear anyone on our ship saying “Boy, I wish we’d had three more days in Cuba to dig into the local experience.” People were more likely to comment on the poverty and disrepair that they’d observed.

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Move to the UK if you’re an entrepreneur? (10 percent capital gains tax)

Beginning of a new year and time for some tax planning. If you’re not a U.S. citizen and thus subject to worldwide taxation, maybe it is time to move to the U.K.? The all-in tax rate for “entrepreneurs” is 10 percent for capital gains (see Entrepreneurs’ Tax Relief). Compare to 33.3 percent for a California resident (20 percent federal plus 13.3 percent to uphold virtue within the state).

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Cuba could attract Americans with sin?

Happy New Year’s Eve from St. Augustine! My hope for readers is that excessive alcohol consumption doesn’t interfere with the efficacy of their medical marijuana edibles…

Back to my favorite topic: Cuba.

It seems that much of Cuba’s appeal in the pre-Castro days was the availability of goods and services that were considered sinful and therefore illegal in the U.S. For example, Cuba has casino gambling, legal alcohol (during our Prohibition period), and prostitution that was at least de facto legal.

Our Cuban guides suggested that if the U.S. trade embargo against Cuba were lifted, the river of American visitors would flow again.

But would it?

Suppose that the motivation for a lot of American visitors was sin. Isn’t there a lot more competition in that market now?

Boston’s Encore casino will open in 2019. Restrictions on purchasing alcohol have been relaxed town-by-town and day-by-day (now on Sundays too!). New recreational marijuana shops are opening monthly. (Prostitution doesn’t make sense here since the first pregnancy with an upper-income customer would eliminate the need for further sex work; Massachusetts offers unlimited child support profits.)

The Massachusetts resident who isn’t satisfied with that mixture of sin can fly in nonstop comfort to London, which offers casinos, alcohol, and legal prostitution.

Cuba is in rather tough shape physically. Meanwhile, billions of dollars have been invested in competing sinful destinations.

Could it be that the our embargo against Americans going to Cuba for a carefree vacation ends with a whimper rather than a bang?

(Our own New Year’s Eve will be spent catering to the whims of the next generation, so please Party like a Kavanaugh (TM) on our behalf!)

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Rent-controlled San Francisco apartment plus sexual freedom

“When a Boyfriend Joins the Marriage” (nytimes):

I wanted my family. And I wanted my boyfriend.

We set a meeting for the playground the following week. We three adults had planned it out carefully. My son and I would be playing on the monkey bars. My boyfriend would show up and I would introduce him as my friend.

When this began, we still lived in a large apartment in the Mission; there was room for privacy the nights my boyfriend stayed over. It was awkward at first, but as the years passed we spent more time as a foursome — cooking, playing board games.

Then the owner of our apartment decided to sell and offered us an enormous sum of money to surrender our rent-controlled lease.

At the new house, my beau built a platform so I could store the mattress beneath a raised office, but it never felt right. It wasn’t sexy to sleep with him under piles of papers and the glow of the computer screen saver.

Will more people envy her life of sexual adventure or the rent-controlled apartment in San Francisco that she had?

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