50 Comments

Do Patreon donations count as tips? Seems like they should. And in which case, how about (functionally equivalent) Substack subscriptions? Or only if the content is all free and the subscription is a donation?

Expand full comment

"Social security benefits were not taxed before 1983. The tax was introduced then as part of a first reform to stabilize its finances. Taxing social security has the same effect as reducing social security benefits with income, just like other social programs do."

Although it was never discussed openly, I've always believed taxing Social Security benefits was a backdoor way of cutting those benefits, and in a "progressive tax" kinda way. I am not sure whether you are old enough to have lived through that era, but Social Security really was a political "third rail." One year the inflation rate was too low for Social Security to get a COLA bump...and Congress voted to override the formula and give a COLA to the beneficiaries anyhow.

The environment has changed quite a lot since then and I expect the electorate might be more amenable to some sort of cutbacks in the benefits. One thing they could do would be to phase out the aforementioned COLA, which was brought in to offset the punitive effects of late-1970s inflation rates. But as already noted, that had knock-on effects that caused the cost of the program to spiral out of control.

BTW: you don't have to have "worked off the books" to not get Social Security: you could just have been a Fed and been exempt from the withholding your entire working life--as I was. They did change things to make us subject to Medicare withholdings in (IIRC) 1983. And of course they brought in FERS--a defined-contribution system--to replace CSRS--the defined-benefit program I came in under--in 1984. Fro reasons I won't bore you with I opted not to switch, but many did: it was a pretty sweet deal.

Nevertheless, the bottom line is that--yes--I now pay Social Security premiums to get the benefits now that I'm over 65. However, comma...in my last year before I turned 65 I was paying over $1200/month for individual insurance (Blue Cross/Blue Shield) and now I'm paying about $700/month in Social Security premiums, so altogether it's a good deal for me. Dunno how that would work for someone who never paid into the system at all, but that's the deal for people who were for one reason or another exempt from Social Security withholding.

Expand full comment

First preference for SALT is that it just goes away.

Second preference is that it’s just completely detached from state taxes. Grant everyone a deduction equal to $10,000 (property/sales tax, regardless of actual taxes) + 5% of income (regardless of the state income tax, even if it’s zero).

If your state tax bill is more than that, consider moving or voting the bums out.

Expand full comment

Substack donations are tips or income?

Expand full comment

My substack is free, I hope that is clear when you sign up.

Expand full comment

ok, got it

Substack asks us to "pledge our support"

Thanks for clarification

Expand full comment

On the elimination of taxes on overtime; the marginal disutility of additional work hours increases, while marginal tax rates increase. My sister is a teacher who does tutoring, editing, and writing as a side business. I do her taxes for her. Finding the time to do the extra work is difficult, and she has to pay both workers and employee shares of payroll taxes (17.5%) plus her marginal income tax rate. It works out to about a 40% marginal tax rate for her. Every year she says the net addition to her income is not worth it (I agree). For someone with a full time job already, we have to recognize that additional effort is optional and marginally much harder, but presumably we want to incentivize that extra effort. For someone who works full time, the marginal tax rate on additional labor income should be reduced.

Expand full comment
Comment removed
Mar 8
Comment removed
Expand full comment

Hi Dr.Cochrane, I would love to see this issue get some attention. The inefficiency of the tax structure in this situation has always struck me; the high effective marginal tax rate on this income probably discourages many from considering a side business. The effective marginal tax rate is high for those who pay income tax, and might be even more so for those in a lower income range given the phase-out of benefits eligibility with income. There are also costs of running a side business that are difficult to account for and cannot be deducted; the additional hours often come in small blocks and require advertising, travel, and communications effort that is costly in time and unpaid. Best, Sheila Smith

Expand full comment

The good professor does not understand what is happening in the hedge fund and private equity world as it pertains to carried interests. The managers of the relevant funds do everything they can to convert what should be ordinary income, earned as a result of services, into capital gain, earned as a result of the use of capital. The clearest case is that in most private equity funds the manager has the option to waive part or all of its management fee, which should be ordinary income and treat the amount waived as an investment in the fund resulting in capital gain…Yes there is a sharing of risk, but to my mind the “investment” in this case is clearly the result of management services, not a true investment of capital. This, and some other cases, are the essence of the carried interest “loophole”. It needs to be fixed..

Expand full comment

Agreed. It’s just a bonus based upon multi year results. It’s not capital gains.

Expand full comment

I'm not sure about Cochrane, but I think it's likely you who doesn't understand carried interest. See my comment below and , in particular, the comment about the "Midas Misconception". Carried interest doesn't "convert" ordinary income to CG income; it changes the allocation from one partner to another.

Expand full comment

Not sure what the point is. Looking at waiving management fees under the circumstances is similar to a call option. This is one sort of way to look at it, and your concern appears to be about values and the economic magnitude of waived fees for instance as a capital contribution. The waiving of fees can overall be classified, actually, as debt, as equity, and you have your choice depending upon the nature of the thing and controlling industry and financial standards. Your point appears to direct attention as to whether or not fund "managers" are owners or employees, and thereby different possible financial recognition of the waived fees. Whether owners or employees, I dunno, the financial treatment of what is waived might be the same.

Expand full comment

We have at hand an easy fix for all the convoluted, incentive distorting complications to the income tax code. Get Congress to pass H.R. 25 The Fair Tax Act. Quite taxing personal and corporate income altogether; quite taxing wage income altogether. Replace all forms of income taxation and wealth taxation with a simple, visible, national retail sales tax. Boom! Done.,

Expand full comment

This article is definitive proof that people who are,brilliant in one area can be really stupid in another. Professor Cochrans ability to dissect the tax code is remarkable. His comments on DOGE and AID are simply ideological nonsense. I am not surprised that 20 young thugs given the right to perform illegal acts, given the right to threaten civil servants and given a broad ok by someone worth $400:billion can do more damage quickly than people forced to act legally. And I’d live to see Professor Cochran list the ‘rot’ he says has been discovered at AID. AID’s annual budget is about $25 billion. Find $250 million of rot. Not programs you don’t like - you may not like food aid to areas hit by famine, but that’s not rot.

Expand full comment

and your comment is proof that some people are just stupid in every single area :*

Expand full comment

What a burn! What a clap back! No need to substantiate. Everybody obviously know.

Expand full comment

quite remarkable you think an unaccountable government with plainly obvious neglect of the constituency in necessary areas is somehow worth protecting because young people and (not your) billionaire is involved. check your hypocrisy.

Expand full comment

I was talking to someone about tax cuts and deficits the other day and they said something to the effect of, "The only way to cut the deficits is to raise taxes on rich people and the rich people don't want that."

Well, as an official rich person, I'd be just fine with raising taxes on "rich people" provided that we raise taxes on EVERYONE. And I don't mean jack up all of the marginal rates, I mean, get rid of the whole idea of marginal rates and get rid of progressive taxation altogether and have a flat or fair tax and then EVERYONE pays the same rate.

X% of $1,000,000 is still higher than X% of $10,000. Rich people do pay more. Why is this such a controversial idea?

(I understand regressive sales taxes and cost of living etc etc, but we're talking about income taxes only... and even then I'd be OK with certain phaseouts for certain income levels as long as the final rate itself stayed the same.)

You think USAID spending is pernicious? Heck, progressive taxation and the malicious reasoning behind it is a gazillion times more pernicious. The idea that, "You have more, therefore we will take increasingly more from you" is just wrong.

Expand full comment

Although I am not rich, I too would like to keep a little more of what I earn!

Expand full comment

No Tax on Tips. This was offered to swing Nevada, and few other entertainment/retiree states, like Florida.

Think electoral votes. That is what drives campaign promises (and lies).

Expand full comment

Incentives Apply to Politicians:

No Tax on Tips. This was offered to swing Nevada, and few other entertainment/retiree states, like Florida where hotels, restaurants, and lower service wages apply.

Think electoral votes. That is what drives campaign promises (and lies).

Expand full comment

Representative Buddy Carter from Georgia introduced House Bill 25 into this Congressional Session. It is a straight consumption tax and gets rid of the IRS, repeals the 16th Amendment. No more federal taxes on anything, and the country gets its income from sales taxes on the consumption of new goods and services.

Expand full comment

John,

Have you perused the Cato Institute's "Report to the Department of Government Efficiency (DOGE)?" It would be interesting to get your take - https://www.cato.org/white-paper/cato-institute-report-department-government-efficiency-doge

As a grandparent, it pains me to think what legacy the Boomers are leaving behind. I still remember reading about Bowles-Simpson and thinking just maybe. This administration seems to at least recognize the need for action and the value of momentum, perhaps we may actually get a broadened tax base and lower taxes.

s

Expand full comment

„DOGE is going after small (by DC standards) amounts of money that have deeply pernicious effects“ Please give an example of a „pernicious effect“ that DOGE has stopped. HIV vaccinations? Grain sales?

Expand full comment

The funny thing is that instead of eliminating the payments that have “pernicious effects”, they are just closing the whole thing. No cost and benefit analysis. No attempt to keep the NPV positive programs. Ergo, the “fraud” is just being used as an excuse to slash government spending. John should just say that.

Expand full comment

Also, Musk supposedly “detects fraud” in US debt obligations, and the market barely moves. Which is a good indication that the market thinks that all these claims of fraud are BS and John is being naive here.

Expand full comment

Right, what is this fraud they have uncovered and is it in the room with us now.

Expand full comment

Re: Carried Interest

The "loophole" is not taxing capital gains at a special rate. Very few people commenting on this seem to understand what "carried interest" Is and how the allocation among partners works. First, and very importantly, "carried interest" does not entail creating capital gains that would not otherwise exist (there seems to be the general misconception that it's somewhat like King Midas creating CG from thin air). Rather, it entails the allocation of capital gains realized by a partnership among partners. Simply put, rather than allocate capital gains according to the pro rata share of capital contributed, capital gains are allocated non-pro-rata to the general partner, in essence as incentive compensation. This requires agreement among the partners.

Key question: Why on earth would a partner agree to give up a part of his, her or its capital gain share. to the general partner? In doing so, it would generally give up a tax preferenced source of income. Also, if the general partner would simply be paid a normal fee, that fee would be deductible to other limited partners against ordinary income.

The answer to this question is simply that capital gain income and ordinary deductions are not very valuable to certain classes of partners, to wit:

--Tax-exempt partners such as pension funds, university endowments, etc;

--Foreign partners who are not otherwise subject to US tax because the partnership is not engaged in a "US trade or business" (foreign partners in a partnership merely investing in stock of other corporations may escape US tax; however, investments in US real estate would not.

--US C corporations and foreign corporations which are treated as C corporations which are not eligible for special CG tax rates.

"Carried Interest" is essentially. tax arbitrage that plays on the different tax status of the various partners. Allocation of tax attributes among partners goes well beyond capital gains and is, to some extent, a result of the freedom of contract.

Expand full comment

I should add that in the situation where a partner is, say, a US individual and the general partner is another US individual (probably through a transparent entity such as an LLC), both are generally subject to the same CG tax rate. Thus, in cases outside those referenced above, one partner ceding part of his CG to another through non-pro rata allocation, generally doesn't result in any loss of revenue to the US Treasury.

Expand full comment

This is a great point. Thanks for making it. There will be more creative accounting to shift taxable income to tax-exempt institutions. One answer: Get rid of "nonprofits." You're always free to not make a profit if you wish. Like so much else in the US, a worthy idea to gently subsidize private charity has turned in to a monster of taxpayer supported political advocacy. I include universities.

Expand full comment

Provided your sort of comprehensive comment here, and that most all hedge fund entities concerned by this are partnerships, the carried interests do affect capital and not expense accounts. It makes sense that owners should have the privilege of catalyzing capital formation in the entities as managed, but tax attributes and preference items also change with the nature of the financial treatment of compensation. One point of view is carried interests are an alternative financial treatment by the entity that when all is said and done have marginal, possibly, incremental economic effect, which is fine.

Expand full comment

Consumption tax plus income tax for very high earners plus estate tax would be, I think, a good way to tax. And spending tax dollars should only be on projects with high B/C ratios.

Of course, both the revenue side and the spending side are very, very tough to implement.

Expand full comment