What is income and how to tax it

This post is a riff off of Howard Gleckman's TaxVox post Biden’s Tax Plan May Make Congress Come to Grips With The Question: What Is Income? I am posting it here so I can keep track of the response rather than digging through Facebook or TaxVox later.

Marxian economics can clarify a few points. The first is that, if capitalists can give themselves a better deal on benefits, such as health insurance, they will do so. They consider the money to do this as theirs, not the employees. If their obligations to provide benefits decrease, they will not increase salaries. They pocket the difference. Unless wage slavery is assumed in tax policy, the tax policy is incomplete if not wrong. The only scenario where changing a tax break to an income increase would occur is if the government changed withholding tables to force the employer to distribute the amount in cash.

Unrealized capital gains and undistributed shareholder equity are speculative. Indeed, there is no intrinsic value to secondary market stocks. It is literally monopoly money. If there were a wealth tax, the best way to collect (probably the only way) is to collect from the asset creator rather than the asset holder. In other words, if I own $100,000,000 in XYZ shares above the floor and the tax rate were 1%, the responsibility to self report would be may accountant (because that works so well now in paying these taxes currently - hint- sarcasm) or to have XYZ company write a check for a $1,000,000 to the IRS.

Anyone who thinks that this won't be made up for in lower wages (to the extent that this is allowed by monopsony power), higher prices (to the extent that this is allowed by monopoly power) or by stock price declines (making other shareholders eat the loss) is welcome to contact our former President. He has some land next to is resort he would like to sell you.

By far, the biggest give away to the wealthy is not unrealized gains, it is the exception to paying taxes on gains and dividends held by mutual funds. The top 10% hold 77.5% of these assets. The top 1% hold 77.5% of that - and so it goes until you get to the top 1450 taxpayers, who own 28% of mutual fund assets. The top 0.1% hold half of these assets.

How to get the money? Tax transactions, not people. That sounds like a slogan! Current tax policy does this implicitly, but with lots of leakage. In other words, when you sell a stock, the buyer is paying you enough to pay your capital gains taxes. That is where the money comes from.

When you sell your labor, the buyer is paying your salary and payroll taxes. When you get a tax benefit, other taxpayers pay more for you to undertake a preferred activity - like feeding your children or paying a higher mortgage to the bank or a higher sales price for your house. As in the article, who actually pays the tax is a matter of perspective. The question is, which perspective is useful.

Mark first sale after inheritance, gift or donation to the Tax Policy Center (et al) unless sold to a qualified ESOP and at option exercise. That means that, instead of taxing the difference in value at exercise at income, you tax the entire purchase at market.

Going back to Marx, the point of income and inheritance taxation was not to fund social welfare. It was to change the human relationships so that workers are not wage slaves. Economics is about social relationships, not accounting. The purpose of tax policy should be to encourage better relationships and punish exploitive ones.

Back to Biden, his plan is a step backwards. It is based on who should be taxed or not taxed, not what. All capital income and gains should be taxed at the same rate - somewhere between 24% (current, when SMI and Pease are included) and 28% or 41%, depending on the asset type. That last bit is a step backwards. I like the $400,000 limit on having pay salary taxes at all, with the rest of salary taxation buried in higher tier taxes paid on salaries but collected and filed by employers. At the highest level, this amounts to a 52% tax on income over $680,000, but it eliminates income shifting.

Eliminating income shifting should be the goal of any analysis defining income. Biden's plan makes the problem worse.